Mortage Insurance Stocks...all below book value.

Just some observations on mortgage insurance stocks.

Stock     Price  Book Price2Book  Debt/Equity

(PMI)PMI Group    $29.62 $43.46  0.68    0.13
(MTG)MGIC Invest  $30.80  $53.68  0.57    0.15
(RDN)Radian Group  $20.64  $51.53  0.40    0.18

-PMI,MTG, and RDN have gone below book value in it's history but normally near 1.
-PMI Group has lots of insider buys. RDN has insider buys as well.
-Third Avenue Management just bought a a 10.7 percent ownership stake in mortgage insurer Radian Group Inc (managed by Martin Whitman, a highly respected value investor).
-MGIC has a nice 3.3% yield.

Homebuilder stocks - buy a book value.

Homebuilder stocks have come back nicely even without good fundamental numbers to back it up. But as inventory gets worked off, demand will exceed supply again. Unfortunately I got into the homebuilder stocks too early.

Lessons learned? Growth rates are too hard to forecast in a decelerating sector. Start buying when homebuilder stocks are at or below it's book value. Case and point with D R Horton (DHI)...it went all the way down to $19.52 but book value was $20. Now, it has risen to $27. If I only patiently waited at $20.......a nice quick 35% return.

It's not easy figuring out the future growth of a company

A couple of weeks ago, I picked the stock, Technical Olympic USA Inc. (TOA), on my clearstation scorecard. This is another homebuilder that has been hit hard by the sector. I never recommended this on my website though because it's not best of breed. I picked it at $11 and the next thing I know it drops to $8 with speculation of bankruptcy. Great timing don't you think?

The reason I picked it was because the book value was $17 (extremely below book value). The current ratio was 8 and 67% insider owned. No indication that it would go bankrupt. Now it's recovered back to $9.47.

Future growth

What's really hard to figure out is the future growth especially in a declining sector such as housing. The growth rates on yahoo is 8% and msn is 14% for this company but is this based on the current EPS of $1.93? If so, based on 9% growth, the return would only be 13% compounded over 5 yrs. Before the quarterly report came out, the earnings were above $3.00 which would have given a compounded return of 20% but I didn't see the quarterly loss coming.

Next year's avg estimate is $1.38 (low estimate is 0.75, high estimate is 3.30....what a disparity!). Should I start my calculation based on $1.93 or $1.38? An accurate starting point is crucial to the outcome of my return on investment. This is the difficulty in forcasting! This is why, it's best to stick with best of breed stocks where earnings are predictable and always rising.

Another reason why I like it was because of it's book value growth from $1.63 in 1997 to currently $17.00...that's 26% compounded growth....let's see how this pick pans out.