Is Radian Group Likely to Outperform?

With shares of Radian Group (NYSE:RDN) trading at around $6.61, is RDN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The first thing you should know about Radian Group is that it’s a volatile stock with a Beta of 3.43 and a short position over 28 percent. If you’re looking for something steady and stable, then you might want to look somewhere else.

In 2012, Radian Group wrote $37.1 billion on new MI business. This was a significant increase over $15.5 billion in 2011. Currently, Radian Group’s risk-to-capital ratio is 20.8:1, and Radian Group expects it to remain below 25:1 through 2013. As far as earnings go, Q4 EPS came in at -$1.34 versus -$0.92 for the same quarter one year ago. Q4 revenue was $226.06 million versus $364.55 million for the same quarter one year ago. For FY2012, EPS came in at -$3.64 versus $2.26 in 2011. FY2012 revenue was $825.41 million versus $1.9 billion in 2011. Supposedly, 2012 was a year of sacrificing for the future, but how many years can this company sacrifice for the future before investors wake up and say, “Wait a minute?” That said, the stock has performed exceptionally well over the past year.

On the positive side, Radian Group has seen increased volume of new, high-quality mortgage business for several consecutive quarters. Radian Group has also reduced delinquent loans by 16 percent. And in January of this year, the company wrote $4 billion of new business. This is in addition to $11.7 billion worth of new mortgage insurance being written in Q4 2012, which was a significant improvement over $6.4 billion being written in Q4 2011.

Back to the negative side, Radian Group has poor margins, an ROE of -35.91 percent, poor cash flow, and revenue growth that is below the industry average.

Let’s take a look at some more important numbers prior to forming an opinion on this stock.