Small Bank with great potential. The Big Banks have made their move, there is time for the small banks in the next quarter.

This mortgage bond insurer has missed out on the small cap party this year battered by nearly 70% as more mortgage bonds blow up. But MGIC is toughening its lending standards and raising rates. "The CEO bought shares around $6.80 give or take,” says Jon Najarian. “I think it has good upside.”

chart

Crazy, but it seems to me that the moves in stocks like Ambac Financial (ABK) and PMI (PMI) or in MGIC (MTG) and MBIA (MBI) may actually be driven by all the stock-picking contest being played right now. That's right, the actual games at CNBC and TheStreet.com.

Yeah, this group is just awful, and the end of the personal mortgage industry -- signified by the incredible shrinking PMI Group (PMI)/MGIC Investment (MTG) and the immolation of Freddie Mac (FRE)/Fannie Mae (FNM) explains a ton.

12. The Gang of Four -- PMI (PMI), MGIC (MTG), MBIA (MBI) and Ambac (ABK): We all know what's happening here -- their insurance might be busted. So many outfits are still valuing their portfolios presuming some insurance protection that when the inevitable happens, we will get a severe hit to everyone's book.

Q: What made you switch to the long side?

A: The stock's down from north of 70 in early 2007 to around 12, bringing its capitalization down to about $1.5 billion. One reason we like the company is that it was able to raise more capital recently, something its competitors haven't been able to do. In March, they did a common offering that raised about $500 million -- so they've been able to raise liquidity and capital. At the same time, they are raising prices on premiums and tightening underwriting on the business now being written. The new business is being written based on lower home appraisals after the housing bubble burst -- and yet they are still showing good growth despite the fact that the whole industry has slowed down. Our thesis is that once MGIC gets through writing down its old book of business, the new book will be very profitable and valuable. Even applying our bearish mortgage-credit outlook, we don't see more than another $4 or $5 per share of losses in the next two years. So current book value of $24 should bottom in the high teens in '09 and start rising from there. They'll be quite profitable after that, given their better margins and more conservative underwriting of the current book of business. The stock should trade upward of two times book. So we see the stock, currently at around 12, as a double-to-triple over the next few years.

On the other hand, "I'm not that high on MBIA (MBI). I don't feel that good about MGIC (MTG). He was also bearish on AIG (AIG) and expressed concern over legal problems at Allstate (ALL).

Cramer: Why MGIC and Others Need to Fail
It's the only way the Fed will cut rates aggressively, says Jim Cramer.

Click here to watch the video.

In the mortgage insurance space, Cramer says he's no longer a seller of MGIC Investment (MTG) and MBIA (MBI) but would not necessarily be a buyer at these levels, either.

well?

Still room on the downside before it turns around

short

Reached for business with focusing on subprime pool insurance

subprime debacle

Sub-Prime issues and weak housing market. Stock should be down way more.

Looming mortgage meltdown in US. Mortgage insurance--poof.