Here Is One of My Best Stock Ideas, Doug Kass Explains
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Radian's Quarter Radiates

As stated earlier, Radian ( RDN) had a large $0.08 EPS beat (adjusted for non-recurring charges -- $130 million of goodwill impairment).

Remember, the shares faltered a quarter ago after disappointing results and I have considered Radian a "show me" stock.

It showed me (and hopefully other investors) this morning!

Importantly, the company achieved a record level of new insurance written in June. Quarterly net insurance written rose by +11% and insurance in force advanced by over 8% (year over year). (Net insurance written was estimated by management at $50 billion for 2017.)

Even more important was the good credit experience -- delinquencies dropped by 8% from the first quarter and, on a year-over-year basis, declined by 20%. This is a function, in part, of the fact that over 90% of the company's insurance in force is new business that was written under more stringent underwriting standards after the Great Recession in 2007-08. The loss ratio fell to under 8% from 21% in the first quarter of 2017 and 22% in the second quarter of 2016.

Radian "kitchen-sinked" the services business (which was acquired from Clayton Holdings about three years ago) after a lengthy strategic review. I suspect that decision (to make the goodwill impairment charge) is masking the strong recurring results, which would have had a more salutary impact on the share price this morning.

I am raising my 2017 EPS from $1.66E to $1.76E and my 2018 EPS forecast from $1.90E to $1.95E.

Radian shares are trading at only 1.3 times book and about 9 times next year's profit forecast. Historically, RDN has traded at more than 2 times book (before the financial crisis) and as recently as two years ago sold at 1.75 times book value.

Radian will be a beneficiary of slightly higher interest rates as persistency (longer average lives of policies) will increase. (Persistency rose from 77% in the first quarter compared to 78.5% in the recently completed quarter.)

My year-end 2017 price target is $20 and for 2018 year end $24-$25. (Should the administration issue pro-private mortgage insurance industry policy, those targets could prove conservative.)

Radian remains on my Best Ideas List (it was added at $10 about 12 months ago) and is trading up small at $17.63.

I am adding to this medium-sized position today.

Position: Long RDN.

More Intel on Ford

Here are some highlights of the Ford ( F) sales conference call:
* If a more normalized fleet number was used to compute the days supply (flat), it would have been materially lower.
* Ford states that it wants to take a disciplined approach to inventory levels.
* Estimates fleet sales will be down 11% in 2017.
* Sees repeat business at higher prices caused by higher interest rates and lower residual values when leases are up.
* Ford observes very little shifting from leases or new vehicles to purchasing used cars. More commonly, the consumer goes down on the model, not from new or leased to used cars. For example, from the Escape to the Edge.
* Ford believes the rental business has been excellent for the company.
* Looking to improve position in large SUV market with the implementation of the Expedition.
* The dealerships are also most interested in the Expeditions with the most features, selling at the highest price point and contributing largest profit per unit.
* Ford expects retail SAAR to be at 15.5 million units in 2017 (-6%).
 
Position: None .

Originally published Aug. 1 at 11:06 a.m. EST

Watch More with TheStreet:

Doug Kass fills his blog on RealMoney every day with his up-to-the-minute reactions to what's happening in the market and his legendary ahead-of-the-crowd ideas. This week he blogged on:
  • How Radian's quarter went
  • How Ford is doing

Click here for information on RealMoney, where you can see all the blogs, including Doug Kass'--and reader comments--in real time.

 

 

 

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