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Tickers in this article: MTG RDN

NEW YORK ( TheStreet) -- Jim Cramer 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:

  • why the bears are wrong on Radian; and
  • why it makes no sense to rotate out of quality stocks into cheaper names in the same sectors.

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


Radian Has Room to Run

Posted at 3:08 p.m. EDT on Friday, March 15

Not up enough. That's how I feel about Radian (RDN) after I spoke to CEO S.A. Ibrahim last night on "Mad Money." This mortgage insurer has had a fabulous run, up recently from $2, but I don't think it is done.

Here's the deal right now. Radian is the No. 1 mortgage insurer in the country. It's biggest competitor isn't a company, it's the Federal Housing Administration, which is under a mandate to get out the business.

The issue had been that there's a ton of old business for which Radian is under-reserved. That was the rap on them from Barron's, which called the company a house of cards.

I think that the new, good business, which is coming fast and furious, will offset the old, poorly underwritten business much sooner than most expect.

More importantly, the company's not under-reserved at all. The reason I think you should buy this stock now is that I bet the company is about to settle a ton of delinquencies that are three years and older, the bad claims. There are about 20,000 loans that are in dispute and they are mostly underwritten by the now-defrocked Countrywide. You could argue that these loans were totally questionable -- some would charge fraudulent -- from day one. Any settlement for these loans may come in at a very low number, maybe at $10,000 a loan, a much lower level than the $30,000 for which they are reserved.

That's important for two reasons:

  1. The bears think that the $30,000 reserve is way too low.
  2. That would allow it to increase its statutory capital. Don't forget that this company just sold 34 million shares for $8 to shore up its balance sheet.

What makes me optimistic that the bears will be wrong and something like $10,000 per claim may be a realistic settlement? Recently, competitor MGIC (MTG) just settled almost 9,000 delinquent loans for $5,000 a claim vs. the $70,000 per claim that Countrywide was asserting. Although Ibrahim could not comment on that possibility, I think it is a very reasonable bet that it could happen and that the remaining bears in the name will be forced to cover.