MGIC, Up 35%, May Have Peaked
Since making its stock market debut in August, MGIC Investment Corp., the private mortgage insurance company, has been a sensation.
But after watching the stock rise 35%, market professionals are waving a yellow flag. They say fresh evidence of economic weakness could cool the stock's prospects.
"I'm a little surprised they've as well as they have," said an industry analyst. "If we really get a decent recovery in housing, they'll do okay, but my gut feeling is that a few peole got carried away by a new offering with a good story."
Others who cite the company's strong fundamentals do not exactly radiate enthusiasm. "Few financial companies can defend their fundamental niche as well as MGIC," said Robert G. Hottensen Jr., an analyst at Goldman, Sachs & Co., New York. He calls the stock "attractive" but does not recommend it for purchase - even though Goldman managed the initial offering.
MGIC, based in Milwaukee, is a leader in the business of insuring banks, thrifts, and mortgage companies against loss on home mortgages with high loan-to-value ratios.
The 11.5 million shares changed hands for $24 each on Aug. 6. The stock has since traded as high as $37.75, but in recent days has edged downward and sold Thursday at $34.875.
An MGIC spokesman, Curt Culver, asserted that the stock has risen on the firm's strong business results. He noted that new mortgage insurance is being written at a pace 27% ahead of last year.
The stock advanced so quickly in value, it exceeded Mr. Hottensen's mid-1992 target price range of $35 to $36. At its current price, the stock trades at over 12 times his 1992 earnings estimate of $2.85 a share.
That puts it well ahead of banks, many of which trade at less than nine times next year's anticipated results. But MGIC's price-to-earnings multiple is in line with shares of the Federal National Mortgage Association and Federal Home Loan Mortgage Corp., to which MGIC has been compared. Shares in the mortgage agencies trade around 11 times earnings.
Besides providing an investment alternative, MGIC has benefited at the expense of banking stocks under an economic scenario favoring nonlenders in the financial services sector.
Two Mortgage Groups
"There are basically two groups of players in the mortgage area," said Gary Gordon, thrift analyst at PaineWebber Inc. "The portfolio group, made up of the banks and thrifts that originate loans, and the secondary market-related group.
"Clearly, group two is doing well right now, while group one is doing miserably," he said. "But whether group two is worth these kinds of multiples remains to be seen."
Group two includes Fannie Mae and Freddie Mac, the principal buyers of mortgages; private mortgage insurers such as MGIC that insure these loans; and mortgage bankers, who are conduits for the loans.
This group is benefiting from the current consensus that the economy is in a weak recovery mode characterized by low, fixed-interest rates, moderate credit risk, and low home price inflation, Mr. Gordon said.
These factors stimulate heavy refinancing of home loans and provide a huge volume of business for insurers, mortgage bankers, and the secondary market buyers. Many loans being refinanced, of course, are adjustable-rate loans made by banks and thrifts at higher rates.
The momentum will shift to the portfolio lenders if the economic recovery strengthens and rates begin rising. But if the economy remains in recession, some analysts warn, the stocks of the secondary market-related firms may look overpriced and face a sharp correction.
"The business climate doesn't feel that good right now, and if we get more data pointing to continued recession or a double-dip in the recovery," noted one cautious observer, "you could see a chill in these stocks."
PHOTO : Quick Run-Up MGIC stock has soared since August debut