The Motley Fool

Home Capital Group Inc. Drops 60%: What Should Investors Do?

Shareholders of Home Capital Group Inc. (TSX:HCG) are screaming at their computer monitors in the wake of a nasty drop in the company’s stock.

Let’s take a look at the current situation, as well as the backstory that has led up to the latest meltdown in the company’s share price.

Where there’s smoke, there’s fire?

Home Capital tanked 60% April 26 after the company revealed it had to secure a $2 billion credit line to protect against heavy capital outflows due to depositors fleeing the troubled mortgage lender.

The company said its high-interest savings account balances fell by $591 million from March 28 to April 24, and more withdrawals are expected.

The credit line is being provided by and institutional investor, and Home Capital says the costs associated with securing the funds will have a “material impact” on earnings.

The news is the latest in a string of problems that began nearly two years ago when Canada’s largest alternative mortgage lender revealed that alleged fraud practices by more than 40 brokers had added nearly $1 billion in mortgages to the company in 2014. This number was later revised upward to close to $2 billion.

The stock was already down to $26 per share in late August 2015 from its 2014 high of $55. Investors started to pile back into the name through the first part of 2016, driving the shares up to $38 at this time last year.

That proved to be the top of the rally, and the stock has been on a downward trend for most of the past 12 months.

More trouble

In March, several officer and directors received enforcement notices from the Ontario Securities Commission (OSC) regarding the company’ past disclosure practices.

Last week, the OSC came out and said the company’s former officials failed to satisfy disclosure requirements, made “materially misleading statements” and failed to adhere to other securities regulations.

The company said it “believes its disclosure satisfied applicable disclosure requirements, and the allegations are without merit.”

Depositors obviously aren’t waiting to find out.

What should investors do?

At the time of writing, Home Capital trades for $6.75 per share. The stock could see a bounce in the coming days, but the situation looks pretty scary.

Investors who have held the stock for some time have a tough decision to make. Contrarian types, who think this might be an opportunity, should be very careful.

The sell-off might be overdone, but I would avoid the stock today.

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 Andrew Walker has no position in any stocks mentioned. The Motley Fool owns shares of HOME CAPITAL GROUP INC.

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