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Oversold and Undervalued: This Bank Has 36% Upside!

Self-inflicted wounds can sometimes lead to great buying opportunities. There are plenty of such examples. Home Capital Group Inc.’s (TSX:HCG) well-documented mortgage scandals is one of the most notorious north of the border.

The company was trading around $30 per share before it cratered on news that it had falsified mortgage documents and mislead investors. It traded as low as $5.68 before rebounding to approximately 21$ a couple of months later. It became oversold to such a point that Warren Buffet got involved. In 2018, it has traded mainly between 14$ and 17$.

Bad mortgages have reared their ugly head again. This time, their victim is Laurentian Bank of Canada (TSX:LB). The good news is that we now have a great buying opportunity.

Escalating issue

In early December, Laurentian Bank announced $89 million worth of mortgages categorized with “misrepresentations.” These mortgages were sold to an unnamed third party, and the company subsequently announced its intentions to repurchase these faulty assets. The mortgages originated from the B2B bank unit, who caters in part to non-prime borrowers and competes with alternative lenders such as Home Capital Group.

Uh-oh.

It’s easy to understand why the market was skittish. The mere mention of alternative lending makes investors uneasy following the Home Capital fiasco.

Unfortunately, Laurentian’s problems have only just begun. In January, it announced it had re-purchased $180 million worth of faulty mortgages with the potential for an additional $123 million. On May 30, it announced the need to repurchase approximately $125-150 CMHC mortgages, slightly above its January forecast. When all is said and done, Laurentian will have repurchased approximately $420 to $425 million of bad mortgages.

Is it finally over?  The company seems to think so. Laurentian announced that had “successfully resolved the identified issues related to mortgage loans purchased by the third-party purchaser (“TPP”) and has agreed with CMHC on a clear action plan towards resolution on the CMHC securitization program.”

Significant upside

The company expects to put the mortgage scandal behind them by end of year. This is great news for investors. The company has lost 23% of its market value since the announcement. However, the bad mortgages account for less than 1% of the $47 billion in assets the company manages. Putting that into perspective, the sell-off was significantly overdone.

Trading at 8.2 times earnings and at 7.42 times forward earnings, you won’t find a better deal in the financial sector. Once it reverts to its historical P/E average, the company could hit $63.55 per share. That’s 36% upside from today’s share price!

If that isn’t enough, the recent sell-off has caused its yield to soar to 5.51%, topping all of Canada’s banks. Laurentian Bank is also a Canadian Dividend Aristocrat, having raised dividends for 10 consecutive years.

Not only do you get a great entry point, but you’ll also enjoy a higher than normal yield and a growing dividend. Even Warren Buffet would agree that Laurentian Bank is an attractive investment.

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Fool contributor Mat Litalien has no position in any of the companies listed. 

 

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