Why Mortgage Insurers Shares Soared

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of mortgage insurers, including MGIC Investment (NYSE: MTG  ) and Radian Group (NYSE: RDN  ) , soared as much as 28% and 11%, respectively, following an analyst upgrade.

So what: Before the opening bell, Barclays upgraded both MGIC and Radian Group to "overweight" from "underweight." The covering analyst, Mark DeVries, pointed to the fact that more upside than downside exists in the sector, and anticipates earnings will normalize by 2015 as legacy losses are wiped off the books. He placed a price target of $14 on Radian (about 42% upside from where it closed yesterday) and an $8 target of MGIC Investment (nearly 100% upside from yesterday's close of $4.18).

Now what: I often mention that analyst upgrades should be taken with a grain of salt, but this call just seems so astronomically bad, I don't even know where to begin. I can somewhat agree with Mr. DeVries with his take on Radian, which has a high, but shrinking, risk-to-capital ratio around 22. However, the movement and analysis on MGIC over the past few days is so far off base it's ridiculous. The insurer has reported 10 straight quarterly losses, it's risk-to-capital ratio is nearly double what U.S. regulators want to see at the high-end (44.7:1), and its CEO, Curt Culver, proclaimed that it's likely to get worse before it gets better. As a reminder, insurers have been forced to stop writing policies or have been forcibly shut down for risk-to-capital ratios in the 42:1 to 58:1 range! This whole thing stinks of emotional trading and I'd avoid mortgage insurers like the plague at the moment.

Craving more input? Start by adding MGIC Investment and Radian Group to your free and personalized Watchlist so you can keep up on the latest news with the company. 

With so many of the big finance firms getting bad press these days you may be inclined to stay away from the sector entirely, but that could be a huge mistake. In fact some of the best opportunities over the next few years can be found there, including one small, under-the-radar bank. It's been called one of "The Stocks Only the Smartest Investors Are Buying." You can learn about it, and more, in The Motley Fool's exclusive free report. Just click here to keep reading.


Read/Post Comments (3) | Recommend This Article (1)

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  • Report this Comment On March 05, 2013, at 4:26 PM, bloodhoundgrl wrote:

    Thanks for offering several concise, clear reasons why these huge gains are undeserved. I haven't been a day-trader in years nor do I reflexivly short anything but when I saw the action in MTG today, I just couldn't resist shorting, not daytrading though the money flow chart does look like a day-trader's dream. And look, it's lost 8% after hours already. I'm also not one to sit in the chat rooms and yell "pump & dump" but it will be very interesting to see the insider & institional selling.

  • Report this Comment On March 05, 2013, at 4:39 PM, bloodhoundgrl wrote:

    Ah, there it is: upgrade, then dilutive offering that was SIGNED yesterday but not announced until after hours today; so blatant it should be criminal.

  • Report this Comment On March 05, 2013, at 6:23 PM, fm2000 wrote:

    sorry for your loss, dog

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