Why Home Capital Group Inc. Looks So Good

Last week, shares of Home Capital Group Inc. (TSX:HCG) declined approximately 10% on the news the company fired the CEO. Although shares rebounded the next day, the loss still remains close to $2 per share for the week.

A $2 loss on shares which began the week near the $28 mark is still significant. The move for the week was down approximately 7%. While this is not so good for holders of the stock, the pullback could be fantastic news for those waiting on the sidelines.

After the pullback, shares now offer new investors a yield close to 4% and the potential to enhance returns with capital appreciation. Closing near the $26 mark, shares are trading at 104% of book value.

The reason many are afraid to take the risk of investing in the company is due to the constant bad press generated from short sellers south of the border that are hoping to see Canada experience a 2008/2009 type of American housing crash. Although this may be possible, it is highly unlikely.

Anyone with mortgage is all too familiar with the amount of regulation and responsibility involved with obtaining one. In Canada, borrowers are not able to walk away from the mortgage without paying back every penny borrowed plus interest. The only exception is bankruptcy.

An incident at Home Capital Group occurred several years ago; it involved approximately 45 mortgage brokers that were dismissed, and the company is being investigated for its handling of the matter.

With a number of bank “incidents” making headlines in the past year, short sellers may be looking for their next victim. The premise for some is very simple: “Where there’s smoke, there must be fire.”

Unfortunately, for those jumping on the bandwagon this late in the game, we must realize the company has been under fire for some time, and due to the efficiency of the market, the share price reflects the views of the short investors.

With so much bad press, the company’s share price has suffered, declining in excess of 15% year-to-date, but it may now be in prime position to run like a bull.

The stock currently offers a 4% dividend and a low payout ratio which can be increased. It trades at a trailing price to earnings of approximately seven times and has a number of short sellers who, at some point, will cover their positions.

Shares are trading close to book value, and company management has been very good at conducting share buybacks. The expectation is that the share buybacks will continue. Home Capital Group has $1.2 billion sitting in cash and a market capitalization of approximately $1.7 billion.

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Fool contributor Ryan Goldsman has no position in any stocks mentioned. The Motley Fool owns shares of HOME CAPITAL GROUP INC.

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