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Home Capital Group (HCG)

164K views 715 replies 74 participants last post by  hboy54 
#1 ·
Hi guys

Is anyone else following HCG? HCG is a mortgage lending business in Canada. I became interested in the stock after it was recommended on BNN. I'm still fairly new to investing and the majority of my money is in indexes, however I want to branch out into stocks that are fundamentally sound with dividends that I can hold for a long time.

So I did some research on HCG dating back from 2009.

It has increasing revenues and EPS each year.
Rates as a buy or strong buy by all analysts.
PEG is 0.89.
ROE consistently over 20%. Not increasing but decreasing over the past two years however.
Earning surprises have been positive or neutral over the years.
Earnings also better than the average industrial earnings.
Earning forecast also positive.
Consistent dividend increases
PE is 11.3 and the TSX is like 13-14?

Cons:
Insider buying is negative.
Some economists are expecting an eventual pull back on the Canadian housing market.
Increase interest rates resulting in decrease housing demand
Its currently at market highs and I don't expect the big jump in stock price like we've seen in the past year.


I'm also interested in Canadian banks but they all seem expensive at the moment too
 
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#57 ·
[No position on HCG, but lean towards the short thesis.]

Going forward, they're tightening up. But those brokers that they dropped weren't added a few weeks ago, they've been feeding HCG mortgages (possibly bad mortgages) for years, and we saw a rather large drop in originations -- that to me suggests that a big part of the existing book is questionable. I wouldn't be so quick to think of this move as a mis-pricing.
 
#58 ·
Going forward, they're tightening up. But those brokers that they dropped weren't added a few weeks ago, they've been feeding HCG mortgages (possibly bad mortgages) for years, and we saw a rather large drop in originations -- that to me suggests that a big part of the existing book is questionable. I wouldn't be so quick to think of this move as a mis-pricing.
This is spot on.

HCG story has always been... yes, we are a sub-prime lender, but fear not, we are very conservative. Termination of brokers and the corresponding drop in originations puts a gaping hole in their story.

[No position]
 
#60 ·
I read it, and it doesn't move me, there's no new information.

If you think real estate will crash by 50% in the next year, then yes HCG is a great short. Short away. But if it doesn't substantially materialize in the short term, you are going to be disappointed. I think the easy money has been made on the short side, and HCG's position is very solid and actually far superior to other financial companies on practically every measure.
 
#65 ·
Californian short seller targets Home Capital Group, Canadian real estate

Instead he is aiming his efforts at one company: Home Capital Group. The company, through its subsidiary Home Trust, has emerged as one of Canada’s largest alternative lenders, offering mortgages to borrowers who may have been turned down by major banks.

It is not the first time that Mr. Cohodes has targeted a Canadian firm. In the 1990s his hedge fund bet against Canadian beverage-makers Cott and Clearly Canadian, and had more than one run-in with Kevin O’Leary over the former Dragons Den star’s software firm, The Learning Company. “We made an awful lot of money being short Kevin O’Leary,” he says.” More recently, he has bet against Waterloo, Ont., software company Open Text.

Canadian companies tend to take short selling more personally than Americans, he says. “For some reason they think it’s like me calling their wife ugly or fat. It has nothing to do with it.”
Globe and Mail:
http://www.theglobeandmail.com//rep...tate/article25715455/?cmpid=rss1&click=sf_rob
 
#66 ·
HCG may be the canary in the coal mine that all is not well in Canadian real state, or that it has peaked.

Their recent guidance that loan origination is much poorer than expected shouldn't be brushed off. One interpretation is that it was just a bad quarter. The other interpretation is that Canadian housing has peaked, and we're seeing the start of the decline. When those things happens, it's businesses at the margins... HCG-like subprime lenders... that first feel the pain.

Don't blame the short sellers. I was short Countrywide Financial as well as other US lenders back in the 2007/2008 crisis. Countrywide didn't collapse because I or others shorted them; they collapsed because they were a crappy business that engaged in reckless lending and a lil bit of fraud. As was common in the subprime lending business.

As for HCG shares... I have no position. I would never short a stock like this at this juncture. Instead, I'd wait to see a rally back to near its 200 day moving average. If it then continues to show weakness, that's when I'd short it.

The behaviour of HCG is also very much going to depend on the broad Canadian market. Right now there's negative sentiment on the TSX. Canada's economy is seen as slowing or already in recession. If things turn around for the broad TSX, you could easily see HCG rally on the optimism.
 
#67 · (Edited)
We know exactly why the originations are down, they ceased business with brokers that did not pass an audit of their internal control systems. This means they are being prudent and conservative, sacrificing the short term for a healthy long term. People have taken this and run with it as a indicator of the exact opposite because they are trying to make fit into their thesis of the entire Canadian market. They have all come out the woodwork to fan the flames of fear for their personal profit. Unfortunately the media, always wanting a good headline, gives a soapbox to a failed hedge fund manager than now farms eggs.

As far as a recession in Canada, it's an entirely regional phenomenon. Ontario, making up 83% of the business, is not in a recession and should come to benefit from the decline of the dollar eventually.
 
#68 ·
What does that mean about the billions of dollars of mortgages originated by those brokers over the past few years?

Agreed that Ontario will be cushioned by the fall of oil prices and the dollar. However, residential real estate 'investment' represents an all-time high percentage of GDP. When the housing construction slows, Ontario is likely to experience recession merely due to job losses in that industry. And completions have been outpacing demographic growth in Ontario for years.
 
#69 ·
What does that mean about the billions of dollars of mortgages originated by those brokers over the past few years?
This has been thrown out before but at this point it is pure speculation. Up to now there is no indication that any of the mortgages are non-performing (I actually read the financials closely). We'll see if loan losses or provisions rise in Q2 in a concerning way. I expect that if this were the case they would have already announced it similar to the originations head's up.
 
#72 ·
I added 100 shares at $28.15 yesterday. Results look fine to me. Apparently shorts hit as much as 38% of the stock at one point. If they keep churning out $1.00-1.10 a share per quarter in earnings with their incredibly low loan losses and solid net interest margin and return to $2M/quarter in originations, those shorts won't be around for long.
 
#73 ·
I agree. If people were expected something juicy out of this report they were quite disappointed. The write offs, provisions, non-performing loans are not in the least bit concerning. The company's disclosure on the broker issue was very appreciated. The only issue is the lack of growth but the stock is really cheap with a decent yield and I believe they will get back to growth. Ten percent a year is fine with me.
 
#78 ·
I've heard TMX apparently won't show all of the short interest, as a lot of US funds will short it through derivatives or other non-TSX means. Short interest was above 30% in July though. You have to wonder if it's found a bottom. It's above the 10 and 20 day moving average.
 
#81 ·
I don't care too much about the stock price (I'm neither long nor short), but I think the nearly $1 billion of mortgage origination fraud they encountered is a really big deal.

I agree with some market observers that this is a canary in the coal mine. It seems that the private mortgage market in Canada is riddled with fraud and liar loans, just like the US subprimes were.

Ignore at your own risk. We have a highly leveraged, low interest rate fueled housing market with rampant speculation. And our market is full of fraudulent mortgages.
 
#82 · (Edited)
I don't care too much about the stock price (I'm neither long nor short), but I think the nearly $1 billion of mortgage origination fraud they encountered is a really big deal.

I agree with some market observers that this is a canary in the coal mine. It seems that the private mortgage market in Canada is riddled with fraud and liar loans, just like the US subprimes were.

Ignore at your own risk. We have a highly leveraged, low interest rate fueled housing market with rampant speculation. And our market is full of fraudulent mortgages.
Please elaborate here ......is this your opinion, or are you attempting to state a fact? What data have you received that indicates our market is "full" of fraudulent mortgages? I respect your opinion on this board J4B, however I find it difficult when people make these types of expressions with no empirical data to support the same.

For the record, I do not own HCG.
 
#86 ·
James, we don't really know how many fraudulent mortgages HCG has on their books. They disclosed the numbers that cover 2014 underwriting. To the best of my knowledge, they never disclosed any numbers that cover the fraud in prior years. The mortgage brokers that committed the fraud in 2014 didn't come on board in 2014. The unanswered question is, how much fraud did they commit before 2014?

The biggest outrage in this whole story is CMHC. They insure mortgages without requiring strict income verification from the likes of HCG. Mortgage companies cut corners when they verify the documents, because they know they can dump the risk on the taxpayer. One can get an insured mortgage with a simple letter of employment. A letter of employment is super easy to forge. Anyone can write a fraudulent letter that inflates income numbers.
 
#88 ·
I actually think insurance underwriters provide some extra scrutiny on mortgage underwriting. I think the weak link here has been the independent mortgage brokers that make money by generating business. Lender exposure will depend on how well the actual lenders scrutinize the deals.

As Killer Z suggests, unsubstantiated hyperbole undermines credibility. Opinion is one thing. Saying something as if it is indeed fact is quite another.

Obvious vested interest here in the following link but no reason to totally disbelieve it either.

http://www.theglobeandmail.com/repo...-in-canada-genworth-ceo-says/article25845447/
 
#90 ·
I agree that IF or WHEN defaults and declines start.........a tsunami can build rather quickly.

Few people are going to buy a home while home prices are falling month to month.

One mistake the US banks made was to diddle around with homes on their books waiting for higher prices. They got stuck with millions of steeply undervalued homes.

They would have been far better off selling the homes for a discount and claiming the loss.

As it was, they ended up paying maintenance costs and taxes for years, while the homes were ransacked and literally fell apart.

Should the worst happen, hopefully our banks learned from that and would price the homes to sell quickly.
 
#91 ·
I would very love for a crash. In today's Toronto housing environment, no-one in my age has a house or even if they do, they are sitting in a huge pile of debt. I know it is not going to be as simple as I said but the housing prices will have to be controlled and maintained in a way that average Canadians should be able to afford one.
 
#94 ·
How far down would the average $1,000,000 home in Toronto or Vancouver have to drop to be affordable to the average person ?

Even if they dropped by 50%............would they be affordable ?

Young people should consider a career in a field that makes them mobile, so they can live and work somewhere other than the bubble cities.

We have nice 1 bedroom condos for $100,000..........and single family homes for $250,000. Lots of people get paid the same regardless of where they live.

I understand that if a person grew up in Toronto or Vancouver, their family and friends are located there.............it is a tough decision to move away.

But we live in Ontario and my wife is from Saskatchewan. We moved from my home to another city for work and then returned after retirement.

You have to do what you have to do.
 
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