Monday, July 8, 2013

Home Capital Group 2

On my other blog I am today writing about oil, trains and pipelines ...continue...

I do not own this stock Home Capital Group (TSX-HCG, OTC-HMCBF). I started reviewing this company in September 2009. It is a dividend paying company and was coming up on lists of good dividend paying stocks. It is on some dividend paying companies lists that I look at.

When I look at insider trading, I find insider selling at $9.6M and net insider selling at $9.3M with some insider buying at $0.3M. Buying was by directors and selling was by CEO, officers and directors. Insiders not only have options, but have option like vehicles called Rights Performance Share Units, Rights Restricted Share Units and Rights Deferred Share Units.

The CEO has shares worth $104M and has options worth $5.4M. The CFO has no shares and has options worth $1.5M. An officer has shares worth $0.2M and has options worth $1.5M. A director has shares worth $0.3M and has options worth $1.5M. This is just to give you an idea on insider share ownership and option values.

The 5 year low, median and high median Price/Earnings Ratios are 6.59, 8.74 and 10.34. The current P/E Ratio is 7.79 based on a stock price of $56.69 and 2013 earnings estimates of $7.28. I get a Graham Price of $69.55. The 10 year low, median and high median Price/Graham Price Ratios are 0.34, 1.19 and 1.55. The current P/GP Ratio is 0.82. Both these tests show that the current price is reasonable.

The 10 year Price/Book Value per Share Ratio is 3.31. The current P/B Ratio is 1.92 a value only 58% of the 10 year median ratio. This test says that the stock is cheap.

The current dividend yield is 1.83%, a value some 3.5% higher than the 5 year median dividend yield of 1.77%. This stock price test shows that the stock price is reasonable. The current dividend is higher than the 5 year median and this is good. However, it is only 3.5% higher so this means the price is reasonable.

The analysts' recommendations are Strong Buy, Buy and Hold. The consensus recommendation is a Buy. The 12 month stock price consensus is $68.70. This implies a 12 month total return of 23.02%, with 1.83% from dividends and 21.19% from capital gains.

Apparently some US Hedge fund managers have been shorting this stock thinking that Canada will also have a real estate meltdown. Certainly, Canadians do not think this. It is a well-run company that is selling at a relatively reasonable to cheap price by my stock tests.

The Canadian Blogger wrote about Home Capital Group in May 2013. He addresses the fact that there are Americans short selling this stock. There is another interesting review by the Common Equity blogger.

The one thing I do not like is that the EPS/CF Ratio is often over 1.00. This means that the cash flow per share is lower than the earnings per share. However, this is just a warning. UC-Berkeley accounting professor Richard Sloan has found through a number of academic studies that companies with low accrual ratios (cash flow higher than earnings) outperform companies with high accrual ratios (earnings higher than cash flow). See Richard Sloan's paper. No stock is perfect.

See my spreadsheet at hcg.htm. This is the second of two parts. The first part was posted on Friday, July 5th, 2013 and is available here.

Home Capital Group Inc. operates through one subsidiary, Home Trust Company, to provide mortgage lending, deposit, retail credit and credit card issuing services. They have subprime mortgages. Its stock is widely held. Its web site is here Home Capital.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.


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