Monday, November 20, 2006

Calls of Note Part 2

- Stifel notes they would use any weakness in MGIC Investment Corp (NYSE:MTG) shares stemming from a negative article in Barron's as a buying opportunity, as they see limited downside (an estimated 13%), even if the bearish case laid out in the article comes to fruition.

In short, the firm sees little new in the Barron's article and would summarize the bearish case presented as less one on MGIC specifically as on U.S. housing, as the key seems to be that the author expects that "the current downturn in the U.S. housing market promises to be no ordinary correction," though this seems to be taken as a given rather than the forecast that it is.

Firm's investment thesis is based on the following factors: 1) recapturing of market share vis- -vis piggybacks, 2) rising persistency, 3) a continued return of excess capital to shareholders, and 4) that MGIC's insured portfolio is less risky than the overall mortgage market and appears decently positioned to weather the current U.S. housing market downturn. As mentioned in the article, current results, especially for 3Q06 support their thesis, especially in regards to top-line growth.

Firm's EPS estimates, which assume deterioration in housing credit though not to the extent implied in the article, remain unchanged at $6.75 and $7.20, respectively. Target price is $80 or 1.4x y/e 2007 book value estimate of $58.38, toward the low end of the historical P/BV range.
Maintains Buy.

Notablecalls: MTG is a recent favourite of the shrinking short community and I guess they talked Barron's into publishing a negative piece on it. Depending on how low the stock opens this AM, I'd be tempted to play it for a bounce. Short interest stands at around 8%.

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