Home Capital Group Inc. (TSX:HCG), one of the largest financial institutions in Canada, has widely underperformed the overall market in 2015, falling about 12.5% as the TSX Composite Index has returned over 1.5%, but I think its stock has bottomed and could be one of the top performers from this point forward. Let’s take a look at three of the primary reasons why this could happen and why you should consider initiating a long-term position today.
1. A growing asset base has led to consistent earnings growth
After the market closed on May 6 Home Capital Group released strong first-quarter earnings results, driven by a growing asset base, but its stock has responded by falling over 8% in the weeks since. Here’s a breakdown of 10 of the most notable statistics from the report compared with the year-ago period:
- Adjusted net income increased 3.7% to $72.29 million
- Adjusted earnings per share increased 3% to $1.03
- Adjusted revenue increased 0.5% $249.23 million
- Net interest income increased 5.5% to $113.12 million
- Non-interest income increased 7.6% to $27.09 million
- Total assets increased 1.1% to $20.51 billion
- Total loans increased 1.7% to $18.19 billion
- Deposits increased 12.7% to $14.64 billion
- Cash flows provided by operating activities increased 32% to $447.61 million
- Book value per common share increased 18.9% to $21.18
2. The stock trades at very inexpensive forward valuations
At today’s levels Home Capital Group’s stock trades at just 9.7 times fiscal 2015’s estimated earnings per share of $4.32 and a mere 8.6 times fiscal 2016’s estimated earnings per share of $4.87, both of which are very inexpensive compared with the industry average price-to-earnings multiple of 12.9.
I think Home Capital Group’s stock could consistently trade at a fair multiple of at least 12, which would place its shares upwards of $51 by the conclusion of fiscal 2015 and upwards of $58 by the conclusion of fiscal 2016, representing upside of more than 21% and 38%, respectively, from current levels.
3. A management team dedicated to maximizing shareholder value
Home Capital Group pays a quarterly dividend of $0.22 per share, or $0.88 per share annually, which gives its stock a 2.1% yield at today’s levels. A 2.1% yield may not impress you at first, but it is very important to note that the company has increased its dividend 21 times in the last 10 years, making it one of the top dividend-growth plays in the financial sector today.
Is today the day to buy Home Capital Group?
I think Home Capital Group is one of the top mid-cap financial stocks in the market today. Its growing asset base has led to consistent earnings growth, its stock trades at inexpensive forward valuations, and it has increased its dividend 21 times in the last decade with a current yield of approximately 2.1%. Foolish investors should take a closer look and consider beginning to scale in to positions today.
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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 Joseph Solitro has no position in any stocks mentioned.