Warren Buffett Exited This Canadian Growth Stock in 2018

Home Capital Group stock has gained over 100% since Warren Buffett exited the stock. Despite its attractive valuation, investors can lose market value in case of a market sell-off.

Aditya Raghunath

Author Bio Aditya Raghunath is a financial writer and equity researcher who has spent more than a decade exploring investing and personal finance. Recognizing how complex financial markets can feel to everyday investors, he turned to equity research and financial journalism to help readers make informed decisions through clear, data-driven analysis. His work has been featured on financial platforms including Benzinga, Barchart, TIKR, and TheStreet.com. Aditya focuses on helping investors identify resilient businesses with durable competitive advantages, strong cash flows, and the potential to compound wealth over the long term. Outside of financial research, Aditya enjoys travelling with his family, exploring new cultures, and following global economic developments. Education Master's degree in Finance and Marketing Areas of Expertise Canadian and U.S. equities Growth and value stocks Dividend investing and sustainability Portfolio strategy Asset allocation Exchange-traded funds (ETFs) Long-term compounding Macroeconomic trends Interest rates Inflation Sector rotation Social Media Profiles LinkedIn Favorite Investment Quote "The stock market is a device for transferring money from the impatient to the patient." — Warren Buffett

Published December 12, 2019 1:00 pm EST

Shares of Canada-based mortgage lending company Home Capital Group (TSX: HCG) have been pretty volatile in the last five years. The stock fell from $42 per share in January 2015 to $8.04 in April 2017. Since then, the stock has gained momentum and is trading at $33.5 currently.

Back in 2017, Home Capital Group was suffering from a liquidity crisis. It was then the Oracle of Omaha, Warren Buffett, pumped in about $400 million into the company to keep it afloat. A Berkshire Hathaway subsidiary also provided $2 billion as a line of credit. Buffett’s investment led to a turnaround in fortunes, and the stock doubled between April 2017 and December 2018.

This was when Buffett exited Home Capital Group. However, investors continued to remain bullish, resulting in a stock appreciation of a staggering 123% this year.

close-up photo of investor Warren Buffett — Image source: The Motley Fool

Is Home Capital Group a good bet for 2020?

Home Capital Group’s sales plummeted from $582 million in 2016 to $291 million in 2017. It ended 2018 with revenue of $419 million. Analysts expect sales to reach $451 million in 2019, $498 million in 2020, and $531 million in 2021.

In the third quarter of 2019, HCG managed to grow sales by 11% to $116.6 million. Its total loan portfolio stands at $16.99 billion, up 6.4% year over year. Loans under administration were up 0.7% at $22.97 billion.

However, its net non-performing loans as a percentage of gross loans rose 15 basis points to 0.49%. Despite the rise in non-performing loans, Home Capital has claimed that they are within internal risk tolerance limits.

HCG continues to progress on its IT roadmap initiative. It launched a fully mobile and responsive broker portal as well as a new CRM system for the greater functionality of its sales team. The company has implemented robotic process automation with 70% of mortgage discharges being automated.

Home Capital is focused on healthy volumes and pricing in its major markets. It successfully launched the first cross-border residential-mortgage-backed securities. Driven by disciplined, risk-based loan pricing and higher rates on new loan originations and renewals, HCG has been able to increase its net interest margin from $1.91% in the third quarter of 2018 to 2.22% in the third quarter of 2019.

Home Capital Growth will slide in a recession

For investors who believe that a recession will hit global markets in 2020, investing in HCG makes little sense. In an economic downturn, the unemployment rates move higher, which will mean the demand for mortgage loans will fall drastically. There is a good chance for the company to be impacted with higher default rates, too.

During the last recession, Home Capital Group saw its stock price decline from $22 in December 2007 to $8.5 in January 2009. It then soared to a record high of $55 by August 2014.

Despite its stellar run in the last two years, HCG stock is trading at a forward price-to-earnings multiple of 10.6. Comparatively, analysts expect earnings to rise by 42.8% in 2019 and 32.9% in 2020.

While Home Capital Group shares are trading at an attractive valuation, the macro outlook for 2020 might deter investors to buy the stock at the current price.