In the investment world, people with all types of backgrounds look at stock prices and do their analysis to come up with a decision. With some stocks it is relatively easy for people to agree with the general view, however there are some where there are competing points of view and you are left to make a decision is the glass half full and which way is it tilting. Robert Gill of Lincluden Investment Management recently wrote about a stock called Home Capital which is Canada’s largest non-prime mortgage lender. In December of 2016  30% of the float of shares was short or equally informed people were making decisions the company’s shares were going to go down sooner than later. Mr. Gill believes the shares will go up.

The shorts have good reasons and their reasoning are 1) the Canadian market resembles the US market in 2008 and therefore should do the same thing. 2) the firm had problems with mortgage brokers making stuff up. 3) the company specializes in making loans to people deemed too risky by Canadian banks – entrepreneurs and new citizens.

Mr. Gill asks are those valid concerns: 1) the Canadian market is much smaller than the US market (think California), which makes it more influenced by local drivers. In addition the Canadian employment levels remains solid and low interest rates reflective of the US fed remain. Home Capital has 85% of its mortgages in Ontario and bulk of those in the greater Toronto area. While it is true some brokers gave misleading information, Home Capital did an audit cut its ties with these brokers however the loans have remain solid with a loan loss ratio of 0.3%which is better than Canadian banks of 0.75%. The reason tends to be the short term nature of the mortgages.

Mr. Gill then analyzing the company – over the past 10 years the return on equity (ROE) has been 25%, over the past 5 years 23% and most recent ROE was 18.6%.

The mortgage market in Canada is worth $1.2 trillion which the big 6 banks control 65% to 75% or there is $400 million to fight over and Home Capital has 4.1% market share there is room to grow.

Home Capital pays a dividend that management was increased regularly over the past decade at present the yield is 3.4% and management has bought shares.

The shares trade at 1.2 times price to book and 7.5 times earnings which compares to 2.0 times and 23% respectively for the broader market. If the shorts begin to unload their position the price could go higher.

Linking to dividend paying stocks, for every active stock there are equally smart people deciding to buy and sell. They buy and sell for many reasons and for their reasons they made a good decision. As you look to buy you are always wondering why is the glass half full and why does not the other side see the same thing? Only time will tell what is the correct answer and that is the reason the only perfect answer is the one seen from the past. We do not know the future but can make educated predictions.

There are more questions than answers, till the next time – to raising questions.