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Mortgage Insurers Rally After Barclays Upgrade

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Shares of MGIC Investment (NYSE: MTG) and Radian Group (NYSE: RDN) rallied in the pre-market Tuesday, up about 9% and 5% respectively.

Analysts at Barclays upgraded both named to Overweight Tuesday, arguing that despite an impressive rally, shares still have ample room for upside. Barclays placed an $8 price target on MGIC (it closed at $4.18 Monday) and a $14 price target on Radian (it closed at $9.87).

Barclays argues that “recent developments have all but eliminated the risk that mortgage Insurers MTG and RDN could be forced into run-off.” Analysts believe the companies could return to “normalized” earnings by 2015.

Shares of these companies have been battered in recent years on legal concerns. In late January, Macquarie downgraded MGIC to Underperform arguing that the valuation was “out of whack.” Macquarie warned that legal costs could drain assets and that regulators could hit the kill switch to cease new business writing.

Yet, Barclays believes that these tail risks are “mostly gone,” and that policy developments suggest “strong future demand” for mortgage insurance.

Still, investors might want to be cautious before jumping in: Shares of MGIC are up nearly 60% in the last week alone, while Radian shares have rallied about 17% over that same period.

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