Probably every Canadian who is DIY investor knows or heard of what happened with Home Capital Group’s stock crash a few months back and its recent recovery.
I have always loved Home Capital Group’s strong fundamentals and cash making ability and have had few shares of the company.
Look at its strong cash flows last 5 years. It made $375M per year on average of last 5 years. Considering its market cap was $1.8B – $3B during the period, the company was traded at 5-8 times of free cash flow which is significantly cheap.
Then here comes political nonsense. In April 2017 OSC (Ontario Securities and Exchange Commission) brought its action against Home Capital Group for allegedly misleading investors through late in disclosure requirements about certain lies in Home Capital Group brokers’ fraudulent mortgage applications specifically customers’ annual incomes. The fraudulent mortgage applications was disclosed in July 2015 and the stock suffered at the time and dropped by more than 20% or so.
What’s interesting is OSC brought its action almost 2 years later the disclosure was made. OSC’s first mandate is protecting investors and its recent action crash the stock price of Home Capital Group by more than 80%. Great job by OSC.
Let me put together a timeline for you to follow.
July 2015– HCG terminated relationships with 45 independent brokers submitted fraudulent loan applications that misstated borrowers’ income and other details and disclosed the facts. The stock dropped by more than 40% over time from $40-45 to $26-27.
Feb 2016– Founder, Gerald Soloway to retire soon
Apr 2016– Solid results and stock buyback to push the stock price up to $39
Mar 2017- OSC started making its move on executives of HCG and HCG fired its CEO Martin Reid and stock dropped by 10% from $27-$25
Apr 2017– OSC filed allegations against Home Capital Group. Depositors started to run and Home Capital Group has to seek very expensive $2 billion credit line. The stock crashed to $6
Apr- May 2017– The Founder, Gerald Soloway to step down and Home Capital Group brought up new BODs
May 2017- Deposit run stabilizes
June 14 2017- Home Capital Group settles with OSC and agreed to pay fine of $30M to OSC. Home Capital Group acknowledges that OSC is not to blame for the fiasco it caused.
June 20 2017– $1.2 billion commercial loan sale to pay off expensive credit line.
June 22 2017– Warren Buffet shark deals to take over 40% of company at significant discount (buying shares at $9.55- $10.30 which is 31-36% discount to the current closing price of $14.94. and provide newer line of credit (not much cheaper than the current line of credit) to replace current line of credit.
What is this? A Hollywood movie?
I bought my shares at $5.99 so I will still be making some cash but I am not too happy about this.
Although Buffett’s name will have significant value over the company on both temporary share price push and the long term positive impacts on the company itself but he is getting 40% of the company so cheaply (40% off to the current stock price!).
When I bought the shares, I was thinking that if the management manages the crisis well, it could recover to the book value of $25-26 and probably get premium over the book value within a year or so. But with Buffett in picture, I have no idea what will happen.
Again this may well have very positive impact! Let’s see what markets does here.
What do you think about the Home Capital Group Fiasco?
Are you having fun? because I certainly am 🙂
Totally crazy WB is in Canada buying 40% of a small alternative mortgage company.
You made so much return on this. Are you thinking of selling?
Yup. I sold out the position today. It may go up higher but I hate dilution so much that it does not matter whether it is Warren Buffett is behind of the dilution.
Bought at $6 and sold at around $17