2 Stocks That Will Cool With the Housing Market

Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB) will find it difficult to thrive if the deep freeze in Canadian housing persists.

| More on:
House Key And Keychain On Wooden Table

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The Canadian Real Estate Association recently released troubling housing market numbers for the month of January. Sales in January 2019 were the lowest since 2015, and housing prices sustained a 5.5% decline year over year. With sales and prices on the decline, debate has erupted on stress tests going forward.

Policymakers argue that the institution of stress tests has been effective in strengthening underwriting quality and in improving affordability. However, there are some problems with this position. New OSFI rules introduced in January 2018 have frozen tens of thousands of potential buyers out of the market. Home ownership rates have declined since 2011, and new numbers suggest that this trend will continue into the next decade.

The federal government has seemingly acknowledged its need to address this issue. CMHC has said that it will pursue a program to dramatically improve affordability over the next decade. Housing trade groups are now advocating for a return to 30-year amortization for CMHC-insured mortgages.

Current regulations will remain in place for now, which means the housing market will face challenges for the remainder of 2019. Let’s look at two stocks that may struggle along with it.

Home Capital (TSX:HCG)

Home Capital stock fell 2.77% on March 7. Shares have climbed 12.3% in 2019 so far. The stock is up 3.1% year over year.

The company released its fourth-quarter and full-year results on February 22. In Q4 2018 mortgage originations rose 85% year over year to $1.61 billion. Net income increased 17% to $35.8 million, or $0.46 per share. For the full year, mortgage originations climbed 15.2% from 2017 to $5.44 billion.

Home Capital forecasts that it will benefit from stabilization in the Canadian housing market in 2019. The stock is trading at the high end of its 52-week range on a pricey TSX index.

Equitable Group (TSX:EQB)

Equitable Group stock has dropped 4.7% week over week as of close on March 7. Shares have climbed 12.8% in 2019 so far. The stock has also increased 22% year over year.

Earlier this week, I’d discussed why I’m staying away from Equitable Group in the spring. The company had a fantastic 2018 in which it posted record adjusted diluted earnings per share of $10.10. This was up 8% from 2017. Single Family Lending saw a big boost, which blew away the company’s projections to start the year. Equitable Group credited a balanced environment and its premier customer service for the solid performance.

Equitable Group is well positioned to post continued growth in its loan portfolio in 2019. I have preferred Equitable Group over Home Capital since early 2017. Not only has it offered superior growth, but the stock also offers a modest dividend yield of 1.6%. So, why am I avoiding it this spring?

Equitable Group only recently fell out of overbought territory. Recent housing numbers are going to put downward pressure on lenders, and a lukewarm bank earnings season has not improved the overall outlook.

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 Ambrose O'Callaghan has no position in any of the stocks mentioned.

More on Investing

Stocks for Beginners

Investing Strategies for Canadians in an Uncertain Economy

These are uncertain times, as the economy grapples with high inflation. Here are four investing strategies for the current market.

Read more »

Tech Stocks

These 3 Cheap Stocks Would Be an Excellent Addition to Your Portfolio

Given their attractive valuation and solid growth potential, these three stocks would be an excellent addition to your portfolio.

Read more »

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Stocks for Beginners

How to Start Investing in a TFSA in a Down Market

Are you interested in starting a TFSA during a down market? Here are a few tips to keep in mind.

Read more »

Gold bullion on a chart
Metals and Mining Stocks

Is Barrick Gold Stock a Hedge Against Inflation?

Barrick Gold is among the largest gold mining companies globally. Is the stock a good bet amid rising inflation rates…

Read more »

Make a choice, path to success, sign
Stocks for Beginners

TFSA Investors: Must-Have Stock Strategies for Your Retirement

While reliable income stocks could help TFSA investors reduce their risk profile, high-growth stocks have the potential to significantly multiply…

Read more »

Happy diverse people together in the park
Stocks for Beginners

3 Stocks New Investors Should Buy Today

The stock market has been hard to gauge for the past year or so. Which stocks should new investors be…

Read more »

Growing plant shoots on coins
Tech Stocks

Market Correction: Don’t Miss These TSX Growth Stocks

Long-term investors shouldn’t miss this correction to accumulate top TSX growth stocks at prices well below their highs.

Read more »