Home Capital Group (HCG.TO)

An excellent company. Ran into some problems last July when it became clear they had accepted applications for mortgages where there was a little fudging. Subsequently, there were concerns about house prices in Ontario. This is a higher risk lending group. Relatively inexpensive.

It is trading at a big discount but has lots of upside potential. The market thinks the price of oil will cause a collapse in the price of real-estate, but he does not believe a word of it.

(A Top Pick Jan 12/15. Down 31.69%.) Little did he know they were subject to fraudulent mortgages. The market caught a whiff of it at the beginning of the year, and the stock plummeted and hasn’t found a base yet. The last two quarters earnings have been fine, but we’ll see what happens going forward. Trading at 6X earnings with an 18% ROE. Expects there will be dividend increases, and they are buying back shares.

They went through the last financial crisis and raised their dividend twice, and increased their earnings in the last financial crisis. It is not trading at 5X earnings on anticipation of slower growth this year. Certainly growth will slow. The competitive market in mortgages is much more intense than it was 2 years ago, but it is the same company, the same management team and the same strategy. Thinks this is still okay. They’ll probably make it through this round as well.

There are some issues here. An undervalued company, and have always been a great lender. A stand-up company with a great management team. Valuation is really cheap, but not something he is willing to step into. Not wildly optimistic that the Canadian economy is going to do great and this company has to have a lot of loan originations.

Everyone knows they found themselves in the middle of a controversy when some of their mortgage brokers had given them some bad paper. None of the mortgages have defaulted. HCG-T’s stock had fallen in half. So he is constructive on the stock. PE is 6.5. The bad mortgages were short term, off the books within a year. You get a yield of 3.25%.

He missed the upside for the last few years. It is not for him. It is too risky at this price.

If you own this, you are better off owning a bank, despite what he said earlier about banks (under NA-T). There is less downside opportunity in banks in the event the housing market in Western Canada slows down significantly. The Canadian consumer is highly leveraged.

On a 10-15 year basis, this has been a fantastic performer. Got a little overvalued when it was close to $50 and 3X BV. The ROE has fallen. Had an issue mid year where they fired a bunch of their mortgage brokers, and this is the main reason why this fell. Had been Short this on a valuation basis. Thinks the overhang is almost done. Covered most if not all of his short positions.

Looking at the P/E ratio of the 40 fastest growing Canadian companies with a market cap of more than $75 million, this is in the cheapest quartile. ROE of about 19%, and trades on 5X earnings and below BV. Now is not the time to be backing up the truck on financials, but if you own them stay with them. Wait until you see a turn in the price of oil.

An extremely well-managed company. They decided to take issue with a number of mortgages that some of their brokers had brought to them. There were elements of exaggerating income, etc. This is a very proactive management and he thinks they are working their way through this. The stock is being severely punished for a company that has done so well for so long. Would buy this if it dipped under $30. Going forward he expects that earnings will be consolidating again over the next year. The ROE will come back and will be reflected in the price.

It has been a long time coming, but there are more and more red flags popping up on Canadian mortgages. This is not a widely cheap stock, and he would have a hard time building a position here. Revenue growth has been slowing down and you might see their ROE take a bit of a hit. Be careful. (See Top Picks.)

Hedge fund managers shorted it for the wrong reasons. It has been hit not by problems in the housing market, but by mortgage broker fraudulent activities. Even the effected loans are performing quite well, the company is saying. Barring a big housing bust, the company is quite cheap at this stage and he would not be selling it. There is no imminent sign of things going wrong unless you are focusing on Alberta. He would be more interested if they started having more free cash flow and started buying back stock and/or raising the dividend.

A tough one to call because it is really a call on how people perceive the Canadian economy and Canadian consumer. It is going to live or die by household formation trends, GDP growth, slowdown in Western Canada, consumer balance sheets and the perception of what happens to the Canadian housing market. Because of this, he would recommend staying away from it.

The biggest risk with this would be headline risks. This is a low ratio lender. They only lend 65% of the value of the house. Even if we get a correction in the real estate market, they are protected because they don’t lend out 80%, 90% or 100%. The opportunity is that valuation has rarely been this cheap. A very consistent grower and there is not much room for multiple contraction.