For investors looking for chances in the market, a disciplined method often gives the best outcomes. One such way is value investing, a plan that involves finding companies trading for less than their real worth. The main idea is to find good businesses that are temporarily out of favor or missed by the wider market, giving a "margin of safety" for the investor. A useful way to use this plan is by using fundamental screens that sort for stocks with good basic financial condition and earnings, yet are priced low. This method helps tell truly undervalued companies from possible "value traps" that are inexpensive for a cause. A recent screen for "Decent Value" stocks, which focuses on good valuation numbers together with acceptable scores for earnings, financial condition, and growth, has found MGIC Investment Corp (NYSE:MTG) as a candidate worth more study.
A More Detailed View of Valuation
The most interesting starting place for a value investor is a company's valuation numbers. A low price compared to earnings, cash flow, or assets is the first sign that a stock may be priced below its worth. According to the fundamental analysis report for MGIC, the company gets a 7 out of 10 on valuation, showing it is priced well compared to its financial results.
Important valuation numbers supporting this score are:
- A Price-to-Earnings (P/E) ratio of 8.19, which is fair alone and clearly lower priced than 68% of similar companies in the Financial Services industry. It differs greatly from the S&P 500 average P/E of 25.79.
- A Forward P/E ratio of 8.45, meaning the good price level continues based on future earnings guesses.
- Good scores on Enterprise Value to EBITDA and Price to Free Cash Flow, with the company being lower priced than about 89% and 86% of its industry rivals on these measures, in turn.
For a value plan, these numbers are key. They give the number-based base for the "margin of safety," meaning the market may be pricing MTG cautiously compared to its current earnings and cash creation ability.
Judging Financial Condition and Earnings
A low price alone is not sufficient; a real value investment must also be a basically good business. This is where the ideas of financial condition and earnings become very important, as they help steer clear of the problems of value traps, companies that are low priced because of basic faults. MGIC's report shows an earnings score of 7 and a financial condition score of 5.
The company's earnings picture is especially strong:
- It has very good margins, with a Profit Margin of 60.84% and an Operating Margin of 79.44%, doing better than over 95% of industry peers.
- Returns on capital are good, with an 11.73% Return on Invested Capital (ROIC) that puts it in the top group of its field.
- The company has been regularly profitable with positive operating cash flow over the last five years.
On the condition side, the balance sheet seems firm. The Debt to Equity ratio is a sound 0.13, better than almost three-quarters of its peers, and the company could in theory pay off all its debt with less than a year's worth of free cash flow. While the total condition score is average, these central solvency numbers point to a steady financial base, which is essential for a long-term value holding.
Looking at Growth and the Total View
While deep-value stocks at times do not have growth, the best candidate shows at least a steady or slightly positive path. MGIC's growth score is a 4, showing a varied but generally okay picture for a value-focused choice. Past growth has been good, with Earnings Per Share (EPS) growing at an average yearly rate of almost 19% over recent years. Looking ahead, analyst guesses are for slow but positive growth in both revenue and EPS.
This growth picture is important for the value argument. It means the company is not in a state of falling but is instead a settled, cash-creating business trading at a low price. The mix of high earnings, a clear balance sheet, and slow growth is often just the picture that can be missed in a market centered on high-growth stories, making the possible chance for value investors.
Is MGIC a Value Chance?
Putting the data together, MGIC Investment Corp presents a case that fits several value investing rules. The stock is priced at a large discount to the wider market and its own industry based on normal earnings multiples. This low price is combined with excellent earnings numbers and a financially steady balance sheet, dealing with main questions about business quality and risk. The slight growth guesses further back the view that this is a steady, set company rather than one in trouble.
Value investors are told to do their own complete careful research, but the basic scores suggest MGIC deserves more examination as a possibly undervalued security. The "Decent Value" screen that found MTG is made to find just this kind of candidate: basically good but fairly priced.
Interested in looking at other stocks that fit this picture? You can run the same "Decent Value" screen yourself to see the current results by clicking here.
Disclaimer: This article is for information only and does not make up financial advice, a suggestion, or an offer to buy or sell any securities. Investing has risk, including the possible loss of principal. You should do your own research and talk with a qualified financial advisor before making any investment choices.