The US housing markets are on their way towards a recovery, and investors, both retail and institutional, are busy trying to make sure they get a piece of the recovery pie. This article will feature three financial stocks that institutional investors think will benefit from the recovering housing markets, which is why I recommend that retails investors consider them as the best way to play the US housing recovery.
One sector that took a major hit during the financial meltdown of 2007 was the mortgage insurance industry. The smaller players went out of business, while the larger ones recognized heavy losses. However, the situation is beginning to reverse as we see signs of improvement in the US housing markets. Bloomberg published an article saying some of the hedge funds are adding mortgage insurers in their portfolio. These hedge funds believe that as the US housing markets rebound, mortgage insurers could be the biggest winners.
MGIC Investment Corp. (NYSE:MTG) is one such mortgage insurer for which hedge funds have a bullish stance. Maverick, which is run by Lee Ainslie, purchased over 23.6 million share of the company during the first quarter of the current year. The stock has doubled since this purchase. Similarly, John Paulson’s hedge fund, which is worth $18 billion, added around 17 million shares of MGIC investment.
MGIC Investment’s share price increased 86% during the first quarter after it plunged 29% during the full-year 2012. Some funds are scaling back after the recent rally, but only because they are realizing profits. Saba Capital Management is one such fund, which slashed its MGIC Investment Corp. (NYSE:MTG) holdings by 87%.
While losses widened at MGIC Investment, much of the prior business which caused significant losses to the company should not be more than half of its total insurance portfolio by the end of this year. Besides, the company is also poised to benefit from the recovering housing markets and an improved capital base. MGIC Investment Corp. (NYSE:MTG) raised $1.15 billion through debt and equity offerings during the prior quarters. The cash was used to replenish its capital base, which eroded during the housing crash. I believe this move was important to raise investor confidence.
Radian Group Inc (NYSE:RDN)
Billionaire John Paulson purchased around 8 million share of Radian Group Inc (NYSE:RDN) thinking that the company will benefit from recovery of the US housing market. Paulson believes the stock can touch the $20 mark by 2015. Soros Fund Management added another 2.8 million shares of Radian in its portfolio.
Radian Group Inc (NYSE:RDN) anticipates that is mortgage insurance unit will turn profitable after years of losses. Its mortgage insurance business unit reported a 69% jump in the mortgage insurance business earnings year-over-year. Besides, Radian raised around $689 million after selling stock and senior notes in February. The cash helped replenish its capital base.
Competition
Radian Group Inc (NYSE:RDN) and MGIC Investment Corp. (NYSE:MTG) compete with Genworth Financial Inc (NYSE:GNW) to insure mortgages. Genworth has shown some improvement in results as its mortgage insurance unit turned profitable after accumulating losses since 2007. The company’s mortgage insurance unit contributed around 68% of the first quarter’s operating income. Its mortgage insurance unit’s US and Australia operations were the reason behind the reversal of losses. Around 45% of the entire mortgage insurance income came in from Australia. Therefore, growth in this segment is of importance for the company. Besides, the company’s life insurance within the US, which accounted for over 54% of the entire first quarter, was a major contributor in the improvement in the first quarter results.
The improvement in the company’s mortgage insurance unit is not significant going forward. This is because seasonality favors the first half of the year. So, the continuity of this profitability remains in question, particularly when the company’s guidance spells out a breakeven or modest profitability. Looking at this, the company has decided to target their operation expenses. An announcement was also made in this regard about eliminating some 400 jobs. This will save around $80 million to $90 million in pre-tax expenses.
Foolish Takeaway
The aforementioned company will benefit the most from a fast improvement in the US housing markets. Some institutional investors are also of the same view. Since institutional investors are better equipped to conduct thorough research on their investments, I believe retail investors should track their investments.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Why Do Institutions Love These Stocks? originally appeared on Fool.com.
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