Analysts are buzzing about what is set to be one of the most closely followed investor calls this year.
Home Capital, one of Canada’s largest alternative lenders, will release earnings on Wednesday and host a conference call with analysts and investors Thursday. The stock sunk more than six per cent on Tuesday as the market is pricing in bad news.
The company recently announced a sharp drop in new mortgages and that it had split with a number of brokers. Sources familiar with Home Capital said that the split occurred after an internal audit discovered improperly documented mortgages.
One of the investors that will be listening Thursday is Marc Cohodes, an American short seller who has been positioned against Home Capital since November. Cohodes formerly worked for U.S. hedge fund Copper River Management and was involved in a number of high profile shorts during his career.
“I’m not short Canada’s banks, I’m not short the housing market, I’m short Home Capital Group and I have been for a while,” he said. “There are a lot of questions around what happened with their brokers and I think they handled disclosing that information poorly.”
Because Home Capital has a large exposure to a portfolio of subprime mortgage loans in Canada, it is seen as a canary in the coal mine to the broader health of the Canadian housing market, which has been on a tear for the past decade. Home prices have risen 79 per cent across the nation since 2005, according to data from the Canadian Real Estate Association. Home prices in the country’s hottest markets, such as Toronto and Vancouver, are up more than 100 per cent.
Home Capital’s stock fell 6.35 per cent Tuesday, or $1.85, to $27.30 on the TSX and has now plunged more than 36 per cent in the past month.
The company’s shares leaped ahead of Quebecor Inc. this week to become the second-most shorted in Canada, with 28.4 per cent of its stock on loan for short selling, according to Markit. That is significantly up from the roughly 18 per cent of shares shorted on July 10, when the company first revealed issues with brokers. Short positions are near the historic peak of just under 33 per cent seen in June 2013, when veteran investor Steve Eisman, who correctly called and shorted the U.S. subprime mortgage crisis in 2007, predicted a Canadian housing correction that year.
Shubha Khan, an equity analyst for National Bank Financial, said that investors want answers about just what happened and how deep any potential problems with Home Capital might be.
“They want to know specifically what the issue was with the broker relationships that were terminated and whether they feel this is a broader industry issue or just an issue with HCG,” he said. “I think investors will also want to know whether further red flags have gone up because the strategic review that uncovered the original issue is still ongoing.”
The scrutiny around Home Capital was made clear Tuesday morning, when another mortgage lender, First National Financial, held its second-quarter call. Many of the analyst questions on that call focused on whether Home Capital’s troubles are part of a deeper, industry-wide issue.
One analyst who agreed to speak only on background said the big question for Home Capital will the extent of the problems with the mortgages.
“The best case scenario is it was just oversight. The worst case scenario? They (may have) uncovered fraudulent mortgages,” the analyst said by phone.
In what was a bit of awkward timing, Home Capital announced late Monday night that veteran director James Baillie, a former chairman of the Ontario Securities Commission, will be resigning. The company said in a statement that Baillie informed the board he wished to resign several months ago, but postponed his retirement until a new director was found to replace him. The statement said his resignation was for “a variety of personal reasons.”
Home Capital, which operates through its brand Home Trust, has seen some recent high profile changes at the senior level. In November, chief financial officer and executive vice-president Robert Blowes announced he was retiring at the end of 2014. In January, chief risk officer David Novak stepped down. More recently, Marissa Lauder, who headed Home Capital’s risk teams, left the company.
Source: Financial Post John Shmuel | July 29, 2015 12:35 AM ET