Equity Financial Holdings (EQI-T)

(Top Pick May 26/15, Up 5.84%) There was some activist involvement and it went bad and the stock fell to below book value. Others in the space are between 2-3 times book value. He has a short position.

(A Top Pick Dec 22/14. Down 16.58%.) Still likes this. The whole space has done poorly. This one has probably hung in better than most of the others. They are not in Alberta. Actually overcapitalized now, so only has about 2 turns of debt compared to the average of about 7X debt to asset ratio. There is a lot of room to grow for this. He has been Short on other names, so is actually up in total.

(A Top Pick June 20/14. Down 9.95%.) The story has not changed. They hired a new CEO and have spent the last year rebuilding the talent base in terms of mortgage originations within the company. Trades below its Book Value, only because the mortgage book shrank over the past year because no one was selling mortgages. They have now re-staffed, so you are going to start to see the mortgage book grow again, which he expects to happen this quarter. When that happens, and the market sees that turn, it is going to start pricing in looking forward. Could see a double in 2-3 years with very little risk.

(A Top Pick Dec 2/13. Down 16.63%.) He was in this because of a good management team that came from an industry that knows how to do subprime mortgages. There was a dispute where management was let go, followed by activists actions that was bringing them back. It turns out there was a settlement, but they didn’t bring back the original management so he got out. It is cheap and they have a lot of cash, so he expects at some point it will get sold.

A very cheap turnaround story. Sold off a processing business about a year ago. In the meantime, some activist shareholders got involved and brought in a new management team that knows more of the mortgage business and are doing a phenomenal job in building out their team. Trading below its BV, which is currently around $9.70 per share, whereas its comps typically trade between 2 and 3 times BV. As the company re-ramps up its mortgage book, you see a pretty easy double here. Thinks the ramp up in their mortgage book is going to happen over the next three quarters and you will see a re-rating in the stock.

(A Top Pick Dec 2/13. Down 23.75%.) This was an event driven situation where they had been successfully operating, but management got forced out. With a dissenting shareholder on board, the idea was to put management back on board. However, there was a compromise and previous management was not brought back. Because of this, he sold his holdings.

There was an executive proxy battle. He does not see how the earnings will now accelerate. It will take a while to ramp up again.

A turnaround story. He is kind of bearish on the mortgage space longer-term, but this stock is just too cheap to ignore. Trading right around Book Value where its competition is trading at 2-3 times Book. New management really understands the Canadian mortgage business, and they are going to start ramping up the loan originations over the next 6-12 months. As they do that, the valuation gap will close between its competition. Also, likes that management knows we are in a housing bubble, and are being very conservative on the kinds of loans they make.

Had a bunch of really big problems in the company. They basically had to throw out the guys that were running the company, and there has been a big change in the board. Although they have lots of capital, they are regulated by OSPI (?). Because of their past transgressions, they are being kept on a really, really tight leash. Their ability to grow the business is quite limited right now. As earnings come in, they are going to come in quite modestly because of the kinds of mortgages they can issue. (See Top Picks.)

Alternative mortgage lenders. Founders came out of Home Capital (HCG-T) a couple of years ago and have done very well. However, suddenly there have been some boardroom changes so there is a proxy battle coming in the next month or so. He is fully confident that the previous management will be restored and the company will be back on a growth path. This could double from here.

This used to be a corporate trust transfer registry company. With experienced managers from Home Capital (HCG-T) they have changed the company into and alternative mortgage provider. Has done very well but recently had some management turmoil with the top 2 guys getting terminated. Feels it was completely unnecessary. Stock could easily be $20 over the next 12-18 months if the board does the right thing.