Gator Capital Management – Enact Holdings: Ignored Stock

Gator Capital Management - Enact Holdings: Ignored Stock

Summary

Enact’s stock is ignored because of its low float.

Enact is the least expensive stock of the publicly traded mortgage insurers.

Many investors are concerned about pressure on Enact’s share price if Genworth distributes its Enact shares to Genworth shareholders.

William_Potter/iStock via Getty Images The following segment was excerpted from this fund letter .

Here is our investment thesis on Enact Holdings (NASDAQ: ACT ). Enact Holdings

> Ignored stock – Enact’s stock is ignored because of its low float. Enact held an initial public offering in September 2021. Genworth retained ownership of 81.6% of Enact’s shares. 9% was sold in a private placement to another money manager, so only 10% of Enact’s shares are free to trade by public investors. This prevents larger investors from taking a significant position in Enact.

Low valuation – Enact trades for 85% of tangible book value and 6x earnings. It is the least expensive stock of the publicly traded mortgage insurers, and we believe the entire group is cheap. The valuations are especially attractive given there are likely very few losses in their existing portfolios, and mortgage insurers have used strong underwriting criteria since the Great Financial Crisis (“GFC”).

Strong housing market – The Millennial Generation is in their peak home-buying years. We believe insurance volume will be robust for all mortgage insurers. Strong housing prices mean that the existing portfolios of the mortgage insurers will experience low losses.

Dividends in the near future – We expect Enact to begin paying dividends to shareholders in late 2022. Because Enact generates more capital than it needs for growth, we believe Enact’s board will set the dividend payout rate at 40% of earnings. This would translate to a stock yield of about 6%, which we think will be attractive to potential shareholders.

Parent oversight – Genworth owns 81.6% of Enact stock, and we believe there are benefits from Genworth’s oversight of Enact. As the only cash-flowing asset owned by Genworth, we think Genworth will encourage Enact to pay dividends to shareholders. Although we don’t expect Enact management to make any poor acquisitions, we believe Genworth serves as an effective blocker of any poor capital management decisions. We acknowledge that Genworth limited their control over Enact by reducing the number of Board seats they control, but we think Enact’s board is aware of Genworth’s preferences for significant capital return through dividends.

Industry growth – The mortgage insurance industry is growing between 6-10% annually. With rising home prices, borrowers will have an even tougher time accumulating money for a down payment, so they will turn to mortgage insurance. Also, the Millennial generation is at its peak years for buying a first home. First-time home buyers are the largest users of mortgage insurance. We believe the mortgage insurance industry will continue to enjoy strong volume growth in the coming years.

Other stock market investors see risks to Enact’s shares:

> Price competition – Some investors point to the potential price competition among mortgage insurance companies. Mortgage lenders choose the mortgage insurer for a borrower. The mortgage insurance industry is very price competitive. Recently, mortgage insurers have been disciplined in their pricing, and we believe investors will react favorably as pricing shows more stabilization this year.

Risk to home price declines – We believe many investors still have fresh visions of home price declines from 2006 to 2010 in their minds. Although home prices have increased substantially, we think the current housing market is fundamentally stronger than 15 years ago. Our two main reasons for this constructive view of the housing market are as follows:

> Almost 100% of current mortgages were underwritten with fully documented loans.

We have a shortage of homes because we did not build enough houses in the 12 years since the Great Financial Crisis. We don’t believe home prices are at-risk in the near-term. We hold this view despite the potential for higher interest rates.

Potential spin-off from Genworth – Many investors are concerned about pressure on Enact’s share price if Genworth distributes its Enact shares to Genworth shareholders. We are not concerned about this possibility because Genworth needs to retain its Enact shares to get the tax-sharing payments from Enact. Genworth has accumulated tax losses and files a consolidated tax return with Enact, so when Enact accrues for taxes and sends that money to Genworth, Genworth can keep the cash because of its past losses.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.This article was […]

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