MGIC Investment currently trades at $27.25 and has been a dream stock for shareholders. It’s returned 277% since July 2020, nearly tripling the S&P 500’s 97.3% gain. The company has also beaten the index over the past six months as its stock price is up 19% thanks to its solid quarterly results.

Is there a buying opportunity in MGIC Investment, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is MGIC Investment Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about MGIC Investment. Here are three reasons why MTG doesn't excite us and a stock we'd rather own.

1. Declining Net Premiums Earned Reflects Weakness

Our experience and research show the market cares primarily about an insurer’s net premiums earned growth as investment and fee income are considered more susceptible to market volatility and economic cycles.

MGIC Investment’s net premiums earned has declined by 1.1% annually over the last four years, much worse than the broader insurance industry.

2. Deteriorating Combined Ratio

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at the combined ratio rather than the operating expenses and margins that define sectors such as consumer, tech, and industrials.

The combined ratio is:

• The costs of underwriting (salaries, commissions, overhead) + what an insurer pays out in claims, all divided by net premiums earned

If a company boasts a combined ratio under 100%, it is underwriting profitably. If above 100%, it is losing money on its core operations of selling insurance policies.

Over the last four years, MGIC Investment’s combined ratio has decreased by 40.1 percentage points, clocking in at 20.1% for the past 12 months. Said differently, the company’s expenses have grown at a slower rate than revenue, which is always a positive sign.

3. Recent EPS Growth Below Our Standards

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

MGIC Investment’s weak 2.8% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.

Final Judgment

MGIC Investment isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 1.2× forward P/B (or $27.25 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.

Stocks We Would Buy Instead of MGIC Investment

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