As broker problems brewed last fall, Home Capital Group CEO sold

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July 31, 2015 - At the request of the Ontario Securities Commission, late Tuesday Home Capital Group (HCG) reported more details on its July 10th press release when it announced that a "review of its business partners led to the company terminating relationships with certain mortgage brokers." On Thursday, investors learned that these relationships with some 45 brokers in total had been been terminated because "falsification of income information had occurred" on mortgage applications.

According to the company, the mortgage broker terminations took place during the period from September, 2014 to March, 2015. During that period, CEO Gerald Soloway sold $2.6 million worth of shares into the public market. One could argue that the amounts were modest. Indeed, after years of low interest rates by the Bank of Canada and unrestrained assorted foreign inflows into the local property market, $2 million is only enough to snag a modest single family home in Vancouver. 

In comparison to the events we saw unfold in the housing market in the United States that led to the the financial crisis, this news out of Home Capital Group hardly compares. That said, investors should continue to pay close attention to what insiders are doing not only at Home Capital Group, but also at other mortgage lenders and real estate oriented credit providers. When we highlighted selling at Home Capital on March 3rd (How long can the Canadian house party last?), we suggested that the sales may be more of a signal about rising risk in the sector than anything specific about the firm. Investors heavily exposed to the Canadian mortgage and residential real estate markets are probably hoping today that Home Capital Group's news this week was a one-off. Time will tell.

Home Capital Group (HCG) Equity Filing Overview Chart


Public-market insider trades, sales in red, buys in green.

Between November 27 and 28 of 2014,  Home Capital Group (HCG) CEO Gerald Soloway sold 50,000 shares in the public market at prices ranging from $52.14 to $52.28. The CEO continues to hold 3,531,366 shares on a beneficial ownership basis according to INK data.

The CEO has not been the only insider selling at the firm. Between September 30, 2014 and yesterday, 8 insiders were net sellers of 135,092 shares worth $6,290,053.

However, the selling is actually below the four-year average for the same length of time. Home Capital Group also has above median ownership (direct & indirect holdings) by Officers and Directors compared to other mid-cap stocks in the Financials sector according to SEDI filings as of July 29th.

Home Capital Group has a cloudy INK Edge outlook on the equally weighted V.I.P. criteria of valuations, insider commitment and price momentum which places it in the bottom 30% of all stocks ranked. INK outlook categories are designed to identify groups of stocks that have the potential to out- or under-perform the market. However, any individual stock could surprise on the up or downside. As such, outlook categories are not meant to be stock-specific recommendations. 

 

An earlier version of this article appeared in the INK Research morning report for subscribers before the market open on July 31, 2015.

 

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