John Paulson, the New York-based hedge fund manager, is known for making bold stock market calls. The Harvard and New York University graduate, which Forbes considers the 31st richest person in America, has gained considerable media attention for his large investment in gold.
Unless you consider yourself to be a casual market observer, you’re probably aware that the SPDR Gold Trust suffered a precipitous 13% decline on Friday, April 13 and Monday, April 15. The recent events in the gold market are believed to have wiped out nearly $1 billion of Paulson’s personal wealth. In addition, his hedge fund has lost an undisclosed amount of money for its high-net worth clients.
Paulson recently told Bloomberg he is standing firm with his opinion on gold, indicating that demand from Asia will support near-term prices. In my personal opinion, I believe the gold market has further room on the downside. The recent move in gold reminds me of the $700 to $600 price drop in Apple, which turned out to be only a slight decline before the precipice. Apple has sustained a floor of $400 in recent weeks, and I am now bullish on the stock.
Readers should reserve judgement on Paulson, as his flagship Paulson Advantage hedge fund has made numerous other successful investments outside of the gold market.
Most recently, Paulson indicated in his letter to investors that he is bullish on mortgage insurers and specialty insurance companies. Specifically, Paulson indicated that he believes Radian Group , the fallen mortgage insurer, could nearly double by 2015 and reach $20 per share. Mr. Paulson also indicated that competing mortgage insurer MGIC Investment and specialty insurer Genworth Financial also have “considerable upside.”
Read on to learn if Paulson’s recent comments can be justified by the fundamentals for all three companies.
Genworth Financial offers long-term care insurance, life insurance, and retirement solutions such as annuities. The company was brought near the brink during the 2008-09 recession and was denied a bailout by the U.S. Treasury. Among other problems, Genworth’s long-term care costs escalated as medical costs rose and policyholders lived longer, caused the company to become financially strapped.
Since the recession, a new management team has been put in place which has focused on addressing existing problems and raising rates on new policies. In addition, Genworth has raised capital in order to shore up its balance sheet.
On March 27, Genworth announced the sale of its wealth management business for $412.5 million, proceeds of which will be used to pay down existing liabilities. The company told reporters in February it was planning the sale for between $400 to $450 million, so the announcement values the WM business at the lower end of the range.
In addition to John Paulson’s favoritism of the stock, Barron’s Magazine wrote positively on Genworth Financial during a March 11 issue that values the stock at $18 a share. The editorial cites a well-respected hedge fund manager who states, “this stock is a solid buy, trading at such a ridiculously low level with solid assets that more than make up for potential losses.”
Genworth releases Q1 2013 earnings on Wednesday, May 1 before the market open.
MGIC Investment Corporation
MGIC operates in the mortgage insurance business, allowing homeowners who are unable to provide a full 20% down payment on their home to purchase MGIC’s insurance at a premium. The policyholder will be required to make a monthly payment to MGIC until the mortgage reaches a certain threshold. In the event of foreclosure, MGIC is responsible for making a comparable payment to the lender.
Clearly, readers can anticipate how MGIC nearly went bankrupt during the 2008-09 recession, as mortgage underwriters at banks provided loans to incapable borrowers. MGIC was then responsible for paying a portion of the bill, resulting in near collapse.
Similar to Genworth Financial above and Radian Group below, MGIC Investment raised much needed-capital in March 2013 in order to survive. The company issued $350 million of convertible debt that is payable in 2020, and 135 million shares of stock were sold at $5.15 per share. All in all, MGIC raised more than $1 billion in order to pay off existing liabilities.
Following the news, analysts at Barclays raised MGIC to “overweight” with a new $8 price target based on reduced risk.
MGIC Investment reports Q1 2013 earnings before the market open on Tuesday, April 30.
Radian operates in the mortgage insurance business similar to MGIC, but the company also has a financial guaranty division which insures municipal bonds and other credit instruments.
Shares of Radian traded above $60/share in May 2007 before the housing bubble and consumer credit began to unwind. Now may be the right time to come back to RDN given ample evidence of a recovering housing market.However, Radian remains saddled with debt and the company would be prone to relapse if it’s customer base becomes unable to pay their obligations once more.
The financially-strapped Radian improved its financial position in February 2013 by issuing new long-term debt and common equity, both of which were bet by strong demand--a sign of investor confidence. The company issued $200 million of convertible senior notes that are due in 2019. Goldman Sachs and Morgan Stanley assisted Radian with the transaction.
In addition to the debt offering, Radian Group issued 34 million new shares of common stock, diluting existing equity holders. The marketplace absorbed the $8.00/share offering and Radian is currently trading above $11, a gain of nearly 40% in less than 3 months time.
Paulson recently stated in a note to clients that he believes Radian can hit $20 per share by 2015. Based on my experience with market behavior, I think the stock can get there sooner. Analysts at Barclays assigned Radian with a $14 price target earlier in March.
Radian is scheduled to release Q1 2013 earnings before the market open on Wednesday, May 1.
Foolish Bottom Line
Genworth Financial, MGIC Investment, and Radian Group have consistent similarities, which is likely why John Paulson is interested in owning all three stocks.
Each company emerged from the financial crisis in a debilitated position with heavy bruises, however it appears that improved financial positioning and a business resurgence warrants further upside in all three names. If readers wished they could go back in time and purchase Bank of America at $4 and Citigroup at $25 in March 2009, then maybe now is the right time to consider Genworth, MGIC, and Radian.
Furthermore, insiders have been scooping up MGIC and Radian in recent weeks, giving further credence to Paulson’s bullish case. I own shares of Genworth in my individual account and shares of Genworth and MGIC in client managed accounts.
Thanks for reading, and consider subscribing to my posts for more Foolish ideas on outperforming the market.