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RRSP Investors: Should You Steer Clear of Housing Stocks?

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Canadian home sales rebounded in March but are still down from the historical average. In fact, sales activity is at its lowest in six years. The slowdown for the Canadian housing sector has motivated policymakers to explore alternatives that may give housing a booster shot going forward.

The Canadian housing industry has attracted pessimism and attention from short-sellers in recent years. Precariousness in the housing sector and the potential for chaos due to ballooning credit has motivated some of the top short-sellers in the world to target Canadian lenders. Should investors saving for retirement do all they can to avoid this sector? Or can the housing market still offer value as real estate remains one of the most crucial sectors in the Canadian economy?

Home Capital (TSX:HCG)

Home Capital is a Toronto-based alternative lender. Shares have climbed 21.1% in 2019 as of close on April 18. The stock is up 23% from the prior year.

Home Capital is expected to release its first-quarter results for fiscal 2019 on May 8. In 2018, mortgage originations climbed 15.2% to $5.44 billion. Home Capital underwent significant internal restructuring after a crisis involving its underwriting practices brought the company to the brink of collapse in the spring of 2017. Net income grew to $132.6 million, or $1.66 per share, compared to $7.5 million, or $0.10 per share, in an extremely turbulent year.

As with other lenders, Home Capital is actively preparing for a tougher credit environment. For the full year 2018, provisions for credit losses were $20.4 million, or 0.13% of gross loans compared to $0.05% at the end of 2017.

Home Capital has seen a marked improvement in earnings performance, but its stock has failed to generate momentum to carry it above the point it reached after the “Buffett bump” in the summer of 2017. The stock offers no dividend and last had an RSI of 67, which puts it close to overbought territory right now.

Equitable Group (TSX:EQB)

Equitable Group is another Toronto-based alternative lender. The stock has increased 22.1% in 2019 as of close on April 18. Shares have surged 30% from the prior year.

Equitable Group is expected to release its first-quarter results for fiscal 2019 on May 9. The company had a stellar 2018, and it saw sales numbers blow its own expectations away. Adjusted diluted earnings per share hit an all-time high of $10.10, which represented 8% growth from 2017. Deposits increased 23% from the prior year to $13.5 billion. EQ Bank deposits surged 34% year over year to $2.2 billion.

The company projects earnings to benefit in 2019 from higher margins, continued growth in its loan portfolio, and the recent acquisitions of Bennington. In its Q4 2018 report, the board of directors announced a quarterly dividend of $0.30 per share, which was payable on March 29. This represents a 1.6% yield. Income investors will not be drawn in by this modest yield, but it is a solid boon as growth has been appealing over the past decade. Equitable Group earnings have been robust in the face of significant headwinds in the broader sector.

I have consistently chosen Equitable Group over Home Capital over the past two years, but its stock is currently trading at the high end of its 52-week range. Shares had an RSI of 64 as of close on April 18, which puts it close to overbought territory ahead of its first-quarter earnings release.

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

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