3 Reasons to Buy Home Capital Group

Despite a run-up in the share price, it’s still a better opportunity than the banks.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In Canada, there are plenty of good reasons to buy shares of the major banks. There is relatively little competition, allowing for high returns. They are growing, at least modestly. And they are well-capitalized, especially compared to their American peers.

But there is another financial services company that scores even better on these metrics: Home Capital Group (TSX:HCG). The company specializes in providing mortgages to people typically turned down by the banks (such as entrepreneurs and immigrants), and has an excellent track record of doing so.

Home Cap’s shares have done very well over the past year, increasing over 55%. But there are still plenty of reasons to buy the shares.

1. High returns

In 2013, Home Cap’s return on equity came in at 23.9%, well ahead of the average for the large banks. In fact the company’s return on equity has remained in the 20s for many years running. Even during the financial crisis, the company’s ROE remained above 27% in both 2008 and 2009.

It is easy to see how the company is so profitable. Despite lending money to higher-risk borrowers, loan losses came in at only 0.09% of total loans. And the company’s expense ratio was under 30%, easily lower than all of the big banks.

The high returns did not come from taking outsized risk. The Common Equity Tier 1 Capital Ratio was nearly 17%, far higher than any of the banks.

2. Room for growth

Most of Canada’s big banks are struggling to find growth, partly because the biggest opportunities are in other countries, which come with lower returns. But Home Capital’s addressable market in Canada is approximately $260 billion worth of mortgages. And despite being the market leader in its space, the company still only has a 3% market share. Home Cap also has opportunities to grow with its other services, such as commercial lending and its Equityline Visa product.

Home Cap’s annual growth target is 10-15%, which it met last year.

3. Not too expensive

Home Capital’s book value per common share is just shy of $17 (after a stock split), meaning that at $44.50 per share, the company trades at 2.6 times book value. But that still only represents 12 times earnings, a reasonable price. A comparison with TD Bank (TSX:TD) provides a perfect illustration.

TD’s most recent results were generally well-received. The company grew earnings by 6%. The Common Equity Tier 1 Capital Ratio is 8.9%. Return on equity now stands at 13.3%. But these numbers are all easily eclipsed by Home Capital. Yet TD trades at 14 times earnings, while Home Cap only trades at 12 times earnings.

Foolish bottom line

The arguments against Home Capital are similar to those against the Canadian banks. Canada’s housing sector appears overheated, and consumer debt levels are very high. But that does not answer the fundamental question: why buy shares of the Canadian banks when one could buy shares of Home Capital instead? The answer remains a mystery.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Supermarket aisle with empty green shopping cart
Investing

$183 for Toilet Paper and Cups: Why We Love Costco Stock

"I literally went up there to get two things."

Read more »

A worker gives a business presentation.
Investing

TFSA Investors: 2 Top Stocks to Buy Before They Rally Any Further

Although plenty of top Canadian stocks have been rallying recently, these two still offer great value and are perfect for…

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

3 TSX Stocks With High Dividend Yields

Are you looking for a great opportunity to bolster your portfolio? Here are three TSX stocks with high dividend yields.

Read more »

financial freedom sign
Stocks for Beginners

1st-Time Investors: 2 Cheap Canadian ETFs to Buy for Financial Freedom 

Investing for the first time but don’t know where to start? Here are two cheap Canadian ETFs that can grow…

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Oil pumps against sunset
Energy Stocks

2 Top Canadian Energy Stocks to Buy Offering Dividend Yields Above 6%

These two top Canadian energy stocks are excellent long-term investments and offer unbelievable dividend yields if you buy them today.

Read more »

Target. Stand out from the crowd
Investing

4 TSX Stocks I Own and Will Buy More of if They Fall

These are my four top choices of TSX stocks that may dip in the future, but will pay me back…

Read more »

Dollar symbol and Canadian flag on keyboard
Stocks for Beginners

The 2 Best Canadian Stocks for Beginners Right Now

Stock market beginners in Canada could kickstart their investing journey by buying these two stocks right now.

Read more »