MGIC Investment upgraded to Outperform, NMI Holdings cut to Neutral at RBC

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RBC Capital Markets analyst Mark Dwelle upgraded MGIC Investment (NYSE:MTG) to Outperform and downgraded NMI Holdings (NASDAQ:NMIH) to Sector Perform after the analyst reassessed mortgage REIT stocks in the light of softening housing demand and higher interest rates.

His upgrade on MGIC Investment (MTG) “balances the sentiment headwind of owning ‘mortgage’ stocks in a market fearful of recession and slowing housing market, with the sizable discount to gook value where MGIC shares currently trade,” Dwell wrote in a note to clients. MTG shares are gaining 2.2% in Thursday premarket trading.

He sees the stock as “attractively valued,” at ~0.8x trailing book value per share. Over time, the shares should rebound to book value, which is increasing due to operating results and accretive buybacks, and perhaps higher, Dwelle added.

Meanwhile, he cut NMI Holdings (NMIH) to Sector Perform as housing demand shifts down due to rising interest rates. “Given relative margins, growth dynamics, and underwriting exposures we see other opportunities which we find more relatively attractive over the near term, despite NMI shares trading below book value,” Dwelle wrote. NMIH shares are falling 1.6%.

Key to his prior Outperform rating on NMIH was the belief that it would grow faster than competitors and accordingly benefit from expense leverage. “While we continue to believe NMI (NMIH) will experience strong growth, the size of the mortgage pie is likely to shrink resulting in less expense leverage than originally anticipated,” the analyst said.

Dwelle’s Outperform rating of MGIC Investment (MTG) contrasts with Seeking Alpha’s quant system rating of Hold and aligns with the average Wall Street rating of Buy. For more on SA’s quant system, which has consistently outperformed the market, click here.

His Neutral rating on NMI Holdings (NMIH) agrees with the quant rating of Hold and diverges from the average Wall Street rating of Buy.

SA contributor Gary J. Gordon, also bullish on MGIC (MTG), sees its shares as “awfully cheap.”