Home Capital Group Inc.: Here We Go Again!

After pulling back under $16, shares of Home Capital Group Inc. (TSX:HCG) are once again a fantastic buy for investors willing to take the leap!

| More on:

Just this week, shares of Home Capital Group Inc. (TSX:HCG) have declined from last Friday’s close of $17.31 to a current price of less than $16, signaling that investors who’d previously believed in the recovery of the alternative mortgage lender may be having second thoughts.

After a tumultuous 2017, the company has managed to put the criminal aspect of the alleged mortgage fraud in the past, as a number of senior level executives have left the company. Following these events, third-quarter earnings still came in on the positive side following a number of additional one-time costs, which ate into the bottom line.

What do we do from here?

At the current price, investors with a medium to high risk tolerance may want to reconsider investing in shares of this alternative lender, as there remains considerable upside. As of one year ago, the company held the biggest market capitalization of any alternative lender by almost a two-to-one ratio. The capacity to borrow, lend, and generate profits for shareholders has not diminished in the least.

As an alternative lender, many of the company’s clientele needs their services much more than the company needs the clientele. Not only is the company in the business of providing mortgages to the country’s B borrowers, but it also has many credit card customers who are rebuilding their credit through smaller variable credit products.

When we break down the company’s cash flow statement for the past three fiscal quarters, the cash flow from operations was positive $67 million for the first quarter, negative $70 million for the second quarter, and an astonishing positive $681 million for the third quarter. Excluding the large change in working capital, the company has been net positive for the year with an increase of approximately $2 million. In spite of the worst calamity ever faced by the company, the cash flow from operations has remained even throughout the year!

Moving on to the balance sheet: the company continues to build tangible book value, as the dividend was eliminated throughout 2017, and shareholders’ equity has continued to grow. In spite of a very lucrative investment made by Warren Buffett, which saw the company issue a greater number of shares, the company continues to carry tangible book value of more than $22 per share, which offers investors a 25% plus discount to tangible book value.

Why is there such as discount?

After dealing with the criminal aspects that faced the company, there are now civil matters to deal with. At least one firm has filed a lawsuit against Home Capital Group due to its actions (or lack of action) during the events which led to this major debacle. In spite of what could be a costly settlement, however, the company has proven that it is capable of turning a quarterly profit on an ongoing basis.

The biggest known risk at this time is just how much the company will earmark for the possibility of a settlement (or defence against these lawsuits). During the next quarterly earnings report, investors will hopefully receive more clarity.

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 Ryan Goldsman has no position in any of the stocks mentioned.

More on Investing

woman analyze data
Investing

Why I’d Buy Nvidia Stock Even at Today’s Prices

Nvidia’s dominant position in the AI space and the ongoing demand for its GPUs suggest that the stock’s upward trajectory…

Read more »

stock analysis
Dividend Stocks

1 Dividend Superstar I’d Buy Over TD Bank Stock

TD (TSX:TD) stock may look undervalued, but there are reasons for the price drop. Meanwhile, this dividend superstar has more…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Wednesday, July 17

Trading just below the key psychological level of 23,000, the TSX Composite has been posting fresh record highs for four…

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Dividend Stocks

Down by 26.77%: Now Might Be the Perfect Time to Buy Nutrien Stock

This TSX stock has seen share prices fall by over 26% from its 52-week highs, but it might be the…

Read more »

Woman has an idea
Dividend Stocks

2 No-Brainer Stocks to Buy Now With $7,000

Two relatively cheap cash cows are no-brainer buys for investors with $7,000 to invest.

Read more »

dividends grow over time
Dividend Stocks

Buy This High-Yield Dividend Stock in July 2024

Buy this high-yielding dividend stock to lock in inflated yield into your portfolio to generate solid passive income for years.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

Where Will Dollarama Stock Be in 3 Years?

Dollarama stock has done incredibly well during economic uncertainty, but what about when the markets recover in the next three…

Read more »

edit Woman calculating figures next to a laptop
Tech Stocks

How to Buy UiPath Stock in Canada

UiPath is a beaten-down AI stock that trades at a massive discount to its earnings growth. Is the tech stock…

Read more »