This Out Of Favor Pick Is Due For A Major Rebound
One of my favorite pastimes is looking at real estate. Dreaming about the “what ifs” is fun and all, but I’m also looking for potential deals.
Back in 2014 and I was looking at a beautiful condo on the shores of Lake Pend Oreille. It was a 1,400 square foot, 3-bedroom, 2 bath condo that included a boat slip. The views overlooked the lake and little beach area. Asking price was $359,000.
I knew it was a good deal, but I couldn’t muster the courage to pull the trigger.
At the time, it seemed high. But I knew it was worth more than that… at least it would be in the near future. After all, there’s only so much lakefront property in the world.
Logistically, though, it would have been tough. I was living in Austin, Texas at the time and it wasn’t exactly a weekend getaway. Plus, I already owned a home that I was paying a mortgage on, and another mortgage payment north of $2,000 per month was extremely daunting — not to mention unaffordable at the time.
To top it off, we were still healing from the housing crisis, and most folks (me included) were very skittish about the housing market.
But one of the best times to buy an investment is when it’s hated and nobody wants to touch it. I know this might sound easy, and is essentially the premise of “buy low, sell high,” but the truth is very few actually do this.
We will easily talk ourselves out of taking such risks, especially when most of our peers are also wary about the space. It’s easier to follow the herd than take the leap.
Today, that same condo is going for more than $825,000…
When you think about it, this all goes back to the premise: “buy low, sell high”. Sounds simple enough, but that typically means buying investments that nobody else wants or likes. Going against the herd plays with our emotions. It’s difficult to overcome, regardless if deep down you know that the investment will be a winner.
A Good “Buy Low, Sell High” Setup
I bring all this up because, as you may recall from a couple days ago, I talked about how insurance stocks are out of favor right now. But they’ve long proven to be wealth-creators over time, and I think now is the time to strike.
So today, while I won’t share my top pick in this space with you today (that’s for Top Stock Advisor subscribers only), I will share with you one that I like. In fact, I like it so much, we did add a small stake to our portfolio.
NMI Holdings (Nasdaq: NMIH) is a different kind of insurance company. This smaller company ($1.2 billion market capitalization) is in the private mortgage insurance business. This is a company that was birthed out of the depths of the last housing crisis.
The company generated more than $345 million in net earned premiums last year, a solid 37% increase over the previous year. Although that growth is expected to slow to a more modest 15.6% increase in 2020.
Its book value grew nearly 24% last year, and its P/BV stands at 1.2, which is below the historical average of 1.8. More impressive is that NMI has grown its investment portfolio to more than $1 billion. Just three years ago its investment portfolio was just over $600 million.
The company operates at an underwriting profit, with a combined ratio of just 41. Since this is the mortgage insurance business we’re talking about, the combined ratios are typically lower than that of a P&C insurer.
But NMI boasts solid profitability, with return on equity of 21% last year, and return on invested capital of 18%.
Shares were crushed from the coronavirus fallout, tumbling more than 70% from their February highs. The stock is still down more than 55%.
Action To Take
While this is a bit more of a “riskier” insurance play, I believe NMIH shares will rebound. It has a more conservative investment portfolio with 100% of its investments in bonds (U.S. Treasuries, municipal bonds, corporate bonds, etc.).
It’s worth keeping in mind, however, that there is uncertainty surrounding the housing market and the ability of some homeowners to pay their mortgage. This is weighing on — and will likely continue — to weigh on shares of NMIH until the picture becomes clearer.
Expect this stock to have more volatility than more traditional insurance companies. But I believe it offers good upside for investors.
As I mentioned in my original writeup on insurance stocks the other day, there’s another corner of the market that I’m watching like a hawk right now…
Specifically, I found a little-known tech stock that’s involved in a confluence of massive tech trends: the Internet of Things, satellite technology, 5G, communication, you name it… And the good news is that right now it’s completely unnoticed by the market, which means it’s the perfect setup to make investors a lot of money in the coming months.