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Jason DonvilleHome Capital GroupHCG.TOBUYAug 22, 2013

(Market Call Minute.) Consistently high ROE. Thinks there is a short squeeze going on by all the Americans that shorted it and he thinks it is going higher.

Jason Donville

Owned

Unlock Rating

$63.06

Stock price when the opinion was issued

$44.26

As of Sep 01, 2023. Market Open.

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COMMENT

Deal with Smith Financial. High quality. Very profitable, offers mortgages at higher rates than banks. ROE is very high. Reasonable valuation, could reach the $50s, possibly room for another bidder. Smith has picked up a good asset at an attractive price.

DON'T BUY

If you want to own a lender, please own Canadian bank stocks instead. HCG and others don't have the same access to capital, so they can get caught in a liquidity squeeze. Borrowers pay a higher rate of interest. If housing market has a hiccup, HCG would be more exposed than the banks.

COMMENT

A very good company in the alternative mortgage space. Big question is, how will all these companies hold up as interest rates run up (how far and how fast?). HCG offers shorter loans, so there's some margin of safety.

HOLD

Long-term history tells him the current price, though at 5-year price to book high, could be a lot higher. FMV potential is well over 100% above current stock price. Don't sell. Big issue is when will they start paying a dividend, instead of just buying back stock?

STRONG BUY

A few years ago, it was one of his beloved stocks until it got slammed by comments from the U.S. and OSC. It has since rebounded. Its fair market value is 154% higher than the current price. If it can break out from the current $45 price, this will enjoy a nice upside. They are also buying back a lot of shares, which he thinks is stupid; raise the dividend instead.

DON'T BUY

Not keen. If you have a sizable portfolio, you probably already have a nice house, so better to diversify your equity portfolio out of what HCG does. Warren Buffett exited.

DON'T BUY

Used to own, but bad things happened and he got out. Economy is lousy, but not as lousy as people thought. Terrific recovery. Still concerns about small businesses. More comfortable investing in the Canadian banks.

BUY

What is interesting about them is that they came through mortgage hell in 2008 with barely a ripple. It has also emerged from COVID-19 issues with barely a ripple. It is very cheap compared to its long term book value of $45. The fair market value is huge and the balance sheet is fine. He wishes they would institute a dividend that would give investors more comfortable that everything is fine. He thinks deferred mortgage payments will not be an issue for them. In a recovery, it will do very well.

DON'T BUY

Management did a great job turning this company around. They probably have a few more risks to deal with at this point. He likes what they are doing. He is not buying it because he does not think you have to go this far down the risk curve right now.

DON'T BUY

It became a show-me stock after its scandal, going sideways, running up only recently then has gone sideways, slightly breaking down now. He wouldn't buy it now, but would rather buy a lifeco. This will underperform in a market slowdown.

WEAK BUY

He recommended years ago when it was around $4. The stock hasn't yet recovered back to its book value. This stock used to trade at a low at its book value before. He believes in the company though he would like to see a dividend.

PAST TOP PICK

(A Top Pick Oct 01/19, Up 41%) He recommended it when it was basing and, as he predicted, it popped. Now, it's peaking, so he expects a 10% pullback, so wait.

BUY ON WEAKNESS

They operate where banks don’t tread. A legitimate business. They got caught in a squeeze with poor transfers in, but now they are doing well. As long as the housing market and economy goes well, it will continue to do well. The low interest rate has helped the company.

DON'T BUY

Confidence in the market is such a big thing for these alternative or sub-prime lenders. Hard time buying it at these levels. It can be a beast of a company, and will probably get back to that in time.

PARTIAL SELL

Recently he took profits, because his cost base was a third of its current price. It's had a tremendous run. The company has come back from its problems a few years ago, thanks to new managers who will continue to do well. He would buy more later. You can take some profits now.

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Jason DonvilleHome Capital GroupHCG.TOBUYAug 22, 2013

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