Home Capital Group (HCG.TO)

There is a lot of flux in that space with everything that has gone on with regulation. You have this long downward trend that is developing a base and really it is developing a descending triangle. If it breaks above recent highs it is positive, but he would be shying away from it.

Technically this has not been doing well. It is coming down to a fairly important support level, but during the last few months it has been in a downward trend. It has been underperforming the market and has negative momentum. Not a good situation to be in.

This got hit with Short selling from the US. Had a misrepresentation problem 21 months ago and none of those mortgages have gone bad. Their loan loss experience on those has been at least as good as the rest of their portfolios. Do the new federal mortgage rules handicap them in any way. Only 8% of their mortgages are insured. The new rules only apply to a very small proportion of their Book, which means they might have a bit of an advantage over some of the other alternative lenders, and even over some of the banks. He estimates the stock is going to make about $4 this year, and is not selling his shares.

You have to recognize that this is a company that operates outside of the banking area. They are off in rural areas and dependent on stuff that the banks won’t take. Thinks people are overemphasizing the risk aspect, because the company has run a good shop over the years. However, he doesn’t think that the atmosphere of concern and distrust is going to disappear anytime soon. Stay away from the area until the stock has a chance to consolidate.

Aside from Ottawa’s announcement today and the use of the Short vehicle, this has had some issues. In the last couple of quarters, looking at their originations (new mortgages), they were 29% and 22%, which sounds like very robust growth, but that is not translating into growth of their portfolios and assets under management. The last two quarters their portfolio was up 10% and 12% respectively, which says there is a lot of runoff in their portfolio. It’s the running/stand still that concerns him. He is leery about this name.

(A Top Pick Sept 17/15. Down 12.97%.) This had a nice bounce back from the original meltdown, which came about from mortgage brokers falsifying documents. He had felt that was overdone. A lot of hedge funds have been shorting this, but it is trading at around 7X PE and has a dividend that is safe.

He thinks it is a crowded trade. He would be wary of it. The issue is that people are expecting a valuation that it will never get.

This has the same guys shorting this company that were ripping into Concordia Healthcare (CXR-T). The company has been struggling with loans. Be careful. It looks cheap, but it can get a lot cheaper.

Thinks the prospects for this are good. It is the senior company in nonprime lenders. He knows of nothing wrong with this company. They had to get rid of some of their brokers at one time.

Has been negative on this, and used to have a Short position. Management announced a Substantial Issuer Bid in February, that took the share price from about $24 up to $36, but it has dropped back to $29. His concern is the originations of their mortgages of 26%, which is very high, while their loan book is flat. They are having to run pretty hard to stand still, which is his concern.

He has loved it since it was $6. It was attacked by short sellers about 18 months ago when mortgage brokers gave them some bad information. All of the mortgages they wrote with these brokers had loss experiences no different than any others. Alberta is not hurting them. It is priced at 7 times earnings when it should be 10 times. It missed earnings recently by 3 or 4 cents.

(A Top Pick Aug 4/15. Down 7.64%.) Feels sorry for this company. They actually do a pretty decent job. ROE is 16%. Came in with earnings last week of $0.99 and missed $1.07 estimate. It trades at about 7X PE. Earlier this year they raised their dividend 9% and bought back $150 million worth of stock. Meanwhile they haven’t issued a new share in over 10 years, and yet the stock continues to languish.

It is tough to get comfortable with them because the Canadian consumer is so highly leveraged. He would prefer to own a bank.

Lost credibility with what happened last year, with some of the mortgage applications that were doctored or exaggerated. Prefers Equitable (EQB-T) which does basically the same business, except they follow everything by the book and have a much higher growth rate. He would switch.

Focused on non-bank traditional mortgages. If you want to play the financial service sector, her preference would be to buy one of the big Canadian banks. (See Top Picks.)