Anyone on here bullish on HCG?

[goodguy1977]

Anyone bullish on hcg? We are short and would like to get any input on why we are on the wrong side?

We were looking for debates with substance.... please no random price targets or just calling us idiots.

Thanks

Goodguy

 

[George The Curious]

I actually agree with you on this. Canadian mortgage and real estate market is headed for a disaster. Your only risk is the irrational exuberance continues pushing housing prices even further up, fueled hundreds of thousands of incoming rich Asian immigrants (mostly Chinese industrialist and their spoiled children) bringing their money from China and India where all our jobs have been outsourced to.

 

[goodguy1977]

I'd disagree with you that Chinese industrialists (and I think you should take that statement back, I know of many spoiled children from many different cultures) is keeping this market up... it's interest rates, plain and simple. And they are going up..... and up....

I appreciate the debate but let's not bring racist statements into this please.

Goodguy

 

[richaceg]

George is hanging around Markham too much...but that's your best example right there...

 

[George The Curious]

I'd disagree with you that Chinese industrialists (and I think you should take that statement back, I know of many spoiled children from many different cultures) is keeping this market up... it's interest rates, plain and simple. And they are going up..... and up....

I appreciate the debate but let's not bring racist statements into this please.

Goodguy

not being racist. there is nothing wrong with being industrialist and wanting to pay lots of money to buy canadian properties. it's just matter of fact. There is even more Chinese immigrants in Vancouver, BC. Look at what they did to that market.

i know your research has primarily focused on employment, and debt to income ratio. But just caution you should also look at the percentage of foreign investment... as long as foreign money views Canada as a safe heaven, our market will remain bubbly.

 

[George The Curious]

George is hanging around Markham too much...but that's your best example right there...

yeah markham is china city for sure. but they are also growing in north york. I went to fariview mall last month, wow I was surprised! 10 years ago, it was majority white, now white is minority.

 

[goodguy1977]

Seriously, can we just keep the racist views off this thread.... anyone have anything to say about HCG? Oh and as for what "they did" to Vancouver... there was this little event called the Olympics that probably contributed to the increase in RE prices. Any fundamental arguments here on HCG?

Goodguy

 

[saxon]

I bought this stock several years ago and doubled my money in about a year. I havent really looked at it for awhile but the company has had a very good long run of increasing profits. You would think that this business would be risky considering the vast majority of their customers are ones that the big banks wouldn't offer mortgages to. However they seem to have a knack of lending to responsible clients as their bad loan numbers are quite lower than the banks. I really see no reason why this company can't continue growing, they obviously know what they're doing. Only question really is should you buy at this level or wait for a pullback. Canada's real estate market is not going to "crash" if anything it will be a soft landing and maybe a pause before things turn upward again. For those who don't know HCG is Home Capital Group. They provide mortgages and loans to those who may not qualify by the banks guidelines.

 

[goodguy1977]

I bought this stock several years ago and doubled my money in about a year. I havent really looked at it for awhile but the company has had a very good long run of increasing profits. You would think that this business would be risky considering the vast majority of their customers are ones that the big banks wouldn't offer mortgages to. However they seem to have a knack of lending to responsible clients as their bad loan numbers are quite lower than the banks. I really see no reason why this company can't continue growing, they obviously know what they're doing. Only question really is should you buy at this level or wait for a pullback. Canada's real estate market is not going to "crash" if anything it will be a soft landing and maybe a pause before things turn upward again. For those who don't know HCG is Home Capital Group. They provide mortgages and loans to those who may not qualify by the banks guidelines.

Hello there,

We want to give you congrats on the 100%+ gain on this stock, that's a great score. However, I'll lay out our short thesis and maybe you can let us know going forward if we are correct or not.

HCG's public line is that they lend to the professionals that banks don't qualify for, ie. doctors and self employed folks. That is only partially correct, I am very familiar with the system and all the major banks do lend to that demographic. I've seen commercial bankers re-create financial statements to get a true sense of their financial situation. HCG management has argued that they get ALL of that demographic, not true... they get the less credit worthy or at least "complicated" clients. = Subprime.

The majority of their business is in Ontario, they don't break down their book of biz by city, but i'd wager most of it is in Toronto. (1 of the 2 big bubble markets)
They have very low loss reserves set aside for credit. We've read reports this is due to great underwriting, but from our experience the flip side is that they aren't recognizing them as of yet. (Accounting quality is very poor) Even with that, if you notice their recent financials, the loss ratios are going up.
A ton of recent insider selling.
The majority of their mortgages are floating rate, thus it becomes easier to qualify. With rates going up, a lot of the borrowers will not be able to keep up with the payments.
They have a freakish streak of 20%+ ROE..... we've dug through the numbers..... LEVERAGE!!!!!!!! (Again, very aggressive accounting)
They do a lot of underwriting work with the banks, thus a lot of the bullish research should be renamed bullshit research.
Technically this stock does not look healthy. (We aren't chartists but we do consult with them)

I'm sorry our points are scattered but what it comes down to is with rates rising, HCG is a ticking time bomb. They've been originating more loans and yet their loan loss reserves are tiny. Oh and as for FICO scores, they can be manipulated (See Country wide in the US)

Please let us know where could be wrong in our thesis. If not, once this thing breaks we will keep shorting it.

Have a great weekend

Goodguy

 

[saxon]

As I said I haven't been following this stock for quite some time. You have taken the time to do your homework on this company. There have been a few money managers who have been on BNN lately who still like this stock. I've just rehashed some of the points they have used to still recommend this stock. While we're on the topic of shorting you might want to look at ACQ. These guys buy auto dealerships and the stock has skyrocketed lately, but a large equity financing to help with their latest acquisition along with some insider selling has some analysts feeling its way overrun.

 

[Richard.TO]

Seems like you've done your homework. I'm not that familiar with this stock but if you want protection in case you are wrong, have you considered buying a put?

 

[goodguy1977]

Seems like you've done your homework. I'm not that familiar with this stock but if you want protection in case you are wrong, have you considered buying a put?

Hi there,

Thanks, we are actually the stock, so buying puts would just enhance our thesis. We may use this but we were looking for a debate to see where we could be wrong.

thanks

Goodguy

 

[ExerciseGuy]

I have not investigated this stock but, based on purely reading the exchange above, have some random thoughts to add to the discussion.

Two of the assumptions you mention are that rates are going to increase and the borrowers are not going to be able to afford to cover the increased interest. While I don't disagree with the first assumption eventually being the case, I don't have a good sense of the timing and magnitude of such an increase. As for the second assumption, can you elaborate on how you are getting comfortable with that? To me, that seems to have the most potential to be an Achilles' Heel to your position.

Although the U.S. and Canadian markets have diverged, I still look to the U.S. market for some influence on direction. In the U.S., there has been a jump in the long-term bond yields. One possible reason for the increase is that there is a growing sense of the economy improving. If that is the case, the cost of increasing rates may be offset by higher income in a better economy. The income increases may outpace interest rate increases given the authorities seem somewhat reluctant to make large moves.

On a separate note, how much of a pullback are you expecting? The stock does seem capable of making some large moves in relatively short time frames (e.g., almost an $8 decline from May 3rd to May 14th). Looking at the option premiums, the suggestion by the earlier poster that puts be used in place of outright short positions (I think that's what he meant, rather than supplementing your short positions) seems reasonable and offers more leverage.

 

[richardstroker]

Anyone look at JE for a short position ? I feel they are headed to zilch ... to much leverage and not many takers on their debt paying CPP 9.75% on there last venture.
also don't really think nat gas is going to skyrocket.

I think the increase in rates are going to be very slow, there is so many people with so much debt in Can and US that a fast rise in rates would cripple things going forward. I don't see many people losing the mortgage. The Gov wont spike rates it will be slow slow slow....look at japan they are still 0% after almost 15 yrs.

 

[goodguy1977]

I have not investigated this stock but, based on purely reading the exchange above, have some random thoughts to add to the discussion.

Two of the assumptions you mention are that rates are going to increase and the borrowers are not going to be able to afford to cover the increased interest. While I don't disagree with the first assumption eventually being the case, I don't have a good sense of the timing and magnitude of such an increase. As for the second assumption, can you elaborate on how you are getting comfortable with that? To me, that seems to have the most potential to be an Achilles' Heel to your position.

Although the U.S. and Canadian markets have diverged, I still look to the U.S. market for some influence on direction. In the U.S., there has been a jump in the long-term bond yields. One possible reason for the increase is that there is a growing sense of the economy improving. If that is the case, the cost of increasing rates may be offset by higher income in a better economy. The income increases may outpace interest rate increases given the authorities seem somewhat reluctant to make large moves.

On a separate note, how much of a pullback are you expecting? The stock does seem capable of making some large moves in relatively short time frames (e.g., almost an $8 decline from May 3rd to May 14th). Looking at the option premiums, the suggestion by the earlier poster that puts be used in place of outright short positions (I think that's what he meant, rather than supplementing your short positions) seems reasonable and offers more leverage.

Hi there,

Thanks for the reply, the nature of an alternative lender is 1. They take on risks the banks don't want (low credit) 2. They rebuild financial statements to get people qualified (questionable quality). From looking at their previous financial statements, they have been experiencing a higher default ratio which was a favourable environment. Thus their book of business probably contains a lot of mortgages that just qualified. An increase in payments would cause that default ratio to rise.

I just want to clarify to a couple of the posts that the rates we are talking about are market rates and not government rates. There is a high correlation between the two but they don't move exactly at the same time always. If you don't believe the Canadian interest rate has not risen, check your bond portfolio, compare the prices a week ago....

As for HGC, management has grown the book with secured lines of credit, which essentially are floating rate mortgages! This sector of the market we can see as a serious threat to the stability of the market. On their last earnings call they mentioned the average FICO score was higher, we believe it is being gamed as it is not consistent with the higher default ratios.

We may look at adding to put options, the issue we have is time decay, plus the spreads are huge. (Check the bid/ask)

Goodguy