MTG Riding Housing Recovery

The largest private mortgage insurer in the U.S. is benefitting from the burgeoning housing recovery.

MGIC Investment Corp. (NYSE: MTG) shares have nearly doubled in the last two months as the U.S. housing market has shown signs of life for the first time since the recession. At $2.89, however, the stock still appears to be a bargain.

From January 2008 to March 2009, the stock fell from $18 a share to roughly $1 per share in the midst of the subprime mortgage lending crisis. By April of 2010, MTG shares had risen all the way back to $12.60. However, the stock has been on a steady decline ever since as the housing market hit a bottom and the company seemed on the brink of extinction.

In July, the share price fell to less than a dollar after the company reported a $273 million loss in the second quarter. Things didn’t get much better in the third quarter, as MGIC reported a net loss of $247 million.

As U.S. housing data has gradually improved, however, investors keen on playing the housing recovery have been snatching up this dirt-cheap small-cap stock by the bundle. Suddenly, MTG shares are an eyelash from topping $3 for the first time since May.

MGIC is slated to report fourth-quarter earnings on January 21. That should give us a true gauge of whether the improved housing market is translating to a healthier bottom line for the nation’s leading mortgage insurer.

But consider this:

• Sales of existing homes are expected to rise to their highest level since 2007 this year, according to a Bloomberg survey of 15 housing analysts and economists.
• Housing prices are projected to jump another 3.3% after an estimated 4.5% increase in 2012. The higher home prices are, the greater the need for mortgage insurance.
• Housing starts are expected to increase 24% to 967,000 in 2013 – also a post-recession high.

If true, those projections bode well for the future of MTG – regardless of its upcoming earnings.

The stock’s recent 92% rally may be just the beginning of a much bigger run.

*Many thanks to my friend and fellow investor Blake Goodman for the idea for this article.