Genworth MI Canada: A Cheap Stock With Potential Risk

On the surface, Genworth MI Canada Inc. (TSX:MIC) looks like one of the cheapest stocks out there, even if shares are flirting with new 52-week highs.

The company earned $4.54 per share over the last twelve months, putting shares at just 8.2 times earnings. Those earnings weren’t buoyed by one-time items or anything like that, either. They came 100% from operations.

Shares are also cheap from a book value perspective. Book value per share is $39.72 while the current share price is $37.20. Genworth is a financial company; so most of its assets are very easily valued. It really is a situation where you can not only buy a dollar for 90 cents, but those assets are also spinning off significant earnings.

It’s no secret why Genworth shares are so cheap. Investors are worried about its exposure to Canada’s housing market. Specifically, what happens if values in both Toronto and Vancouver fall off a cliff?

Naysayers point to Genworth’s $300 billion in mortgage default insurance obligations. If just 1% of those go bad, it’ll cost $3 billion. Genworth’s book value is $3.64 billion. Needless to say, it’ll do some damage.

But bulls point out that much of that $300 billion has been in place for years while house prices were increasing. In other words, it’s only the last $25 billion or so that’s really at risk. It’s still a large number, but much more manageable.

Plus, housing bears have been calling on the market to crash for years now, and nothing has happened. Maybe house prices in our largest cities continue to stay at elevated levels for decades.