MGIC Investment Corp Stock Up 8% in August – Time to Buy MTG Stock?

The price of MGIC Investment Corporation stock has been recovering in August from a pronounced downtrend that started back in April this year after the release of the company’s financial results covering the first quarter of 2021.

So far this month, the stock of the Milwaukee-based financial services firm has advanced 8% while it has delivered a 22.8% gain since the year started.

This latest advance seems to have been prompted by the strong quarterly results the company reported for the second quarter of the year, with both revenues and earnings slightly surpassing the consensus for the period.

Can this fundamental strength push MTG stock to all-time highs soon? The following article takes a closer look at the price action and fundamentals of the firm to possibly answer that question.

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MGIC Investment Corp Stock – Technical Analysis

MGIC Investment Corp stock has not been able to recover from the strong blow the company took during the 2007-2008 financial crisis but has been progressively climbing to higher post-crisis highs as indicated by the weekly chart above.

Based on the latest price action, it seems that the downtrend that started back in April has been reversed on the back of stronger fundamentals, with the share price being pulled back into the rising wedge formation indicated in the daily chart.

Volumes in the past sessions have been particularly high and the stock has managed to climb above its session lows to remain within the wedge even as bears have attempted to break this support multiple times during intraday action.

Momentum readings reinforce a bullish outlook for the stock as the Relative Strength Index (RSI) is climbing to overbought levels for the first time since 28 April. A climb in the oscillator following a pronounced downtrend usually points to a reversal in the stock’s momentum.

Meanwhile, the MACD is also moving higher on increasingly positive momentum and that could support further upward movements for the issue in the following days.

The combination of elevated buying volumes, positive momentum readings, and this latest climb back to the wedge’s formation point to a bullish outlook for MTG stock with a plausible short-term target of $6 for the stock resulting in a potential 6.7% gain.

MGIC Investment Corp Stock – Fundamental Analysis

MGIC’s revenues had been growing at a decent pace before the pandemic stroked, with sales jumping 5.4% in 2018 and 8% in 2019 while they retreated 1.2% in 2020 amid the virus crisis, landing at $1.2 billion.

Meanwhile, the firm’s operating income had also been moving higher for the firm before the pandemic, jumping from $657.9 million back in 2016 to $900 million by the end of 2019. During this period, there was also a significant 1,630 basis point improvement in the company’s operating margin, which ended 2019 at 74.1%.

Moreover, net income rose from $342.5 million to $674 million resulting in a net margin of 65% for the financial company in 2019.

Such strong margins make this business particularly attractive and even though the pandemic temporarily hit the business, it appears that volumes are already on track to recover to pre-COVID levels.

In terms of debt, MTG had long-term financial commitments of $1.24 billion by the end of the second quarter of 2021 on assets of $7.58 billion including $178.6 million in cash. Moreover, the company has been able to grow its free cash flows in the past years, moving from around $530 million produced back in 2018 to nearly $700 million in 2020.

At a market capitalization of $5 billion, the stock is trading at only 7 times its free cash flows from last year. Meanwhile, if the business continues to recover, chances are that this year the company could report similar cash flows compared to 2019 at around $600 and $700 million as well.

It is important to note, however, that this low valuation multiple indicates a fairly pessimistic outlook for the business in terms of its top-line and bottom-line forecasted growth. In the past 5 years, the stock has trailed the S&P 500 as it has delivered similar gains to the broad-market index.

As catalysts for growth are absent from the picture, even though the price of MTG may continue to climb to higher post-GFC levels moving forward, its performance could remain pegged to that of the S&P 500 unless the company manages to accelerate its growth rates.

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