TFSA Investors: 1 Value Stock in Canada’s Red-Hot Housing Market

Home Capital Group Inc. (TSX:HCG) appears to be trading at a very attractive valuation and could provide great returns over the long term.

| More on:

Home Capital (TSX:HCG) is a holding company that offers residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending, and credit card services. In addition, the company offers deposits via brokers and financial planners and through Oaken Financial.

Diverse geographical base

Licensed to conduct business across Canada, Home Capital has offices in Ontario, Alberta, British Columbia, Nova Scotia, and Quebec. The company had an average of 755 active employees during 2020 and competes with regulated mortgage lenders, such as Canadian chartered banks, insurance companies, and financial institutions, and lenders that provide mortgage financing in the single-family dwelling, multiunit residential, and non-residential commercial mortgage lending segments.

Wide array of products

Further, the company offers deposits, such as guaranteed investment certificates, Registered Retirement Savings Plans, high-interest savings accounts, Tax-Free Savings Accounts, Registered Retirement Income Funds, and short-term certificates. It competes against regulated financial institutions that issue credit cards and lines of credit and provide other consumer retail lending.

Growth opportunities in select segments

The uninsured single-family residential portfolio is the company’s primary mortgage portfolio, which consists of primarily uninsured mortgages with loan-to-value ratio of 80% or less, serving selected segments of the Canadian financial services marketplace that traditionally have not been the focus of the major financial institutions. These mortgages are generally funded by the company’s deposits and financing activities.

Lucrative mortgage portfolio

Insured residential lending is very profitable for Home Capital. It includes the company’s insured single-family accelerator mortgages and insured securitized multi-unit residential mortgages. These mortgages are generally funded through Canada Mortgage and Housing Corporation (CMHC) sponsored mortgage-backed security and Canada Mortgage Bond securitization programs. In some cases, these mortgage portfolios may be sold off-balance sheet, resulting in recognition of gains on sale.

Loans funded by deposits

Residential commercial lending is another lucrative area of Home Capital’s portfolio. It comprises insured and uninsured residential commercial lending, which includes commercial mortgages that are secured by residential property such as non-securitized multi-unit residential mortgages and builders’ inventory. Insured multi-unit residential mortgages are included in this portfolio until it has been securitized. These loans are funded by deposits.

Deposit diversification strategies

The company’s uninsured assets are largely funded by Home Capital’s deposit activities. Deposits are generally taken for fixed terms, varying from 30 days to five years and carry fixed rates of interest. The company also has deposit diversification strategies, including growing Oaken Financial.

Low-risk residential securities

In addition to Home Capital’s lending portfolios, the company manages a treasury portfolio to support liquidity requirements and investment of excess capital. The company also has a structured program to provide private placement of residential mortgage-backed securities (RMBS). The RMBS are backed by a portfolio of the company’s uninsured single-family residential mortgages.

Range of mortgage products

The company appears committed to offering a range of mortgage products through Home Capital’s distribution channels. In addition, Home Capital’s subsidiary Home Bank, a Canadian retail bank, offers deposits and mortgages.

Overall, Home Capital appears to be trading at a very attractive valuation and could provide great returns over the long term.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nikhil Kumar has no position in any of the stocks mentioned.

More on Investing

Canada national flag waving in wind on clear day
Tech Stocks

Trump Trade: Canadian Stocks to Watch

With Trump returning to the presidency, there are some sectors that could boom in Canada, and others to watch. But…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Investing

Is Canadian National Railway Worth Buying for its 2.2% Dividend Yield?

Let's dive into whether Canadian National Railway (TSX:CNR) is a top buy for long-term investors at this point in the…

Read more »

nuclear power plant
Energy Stocks

Is Cameco Stock Still a Buy?

Cameco stock recently reported earnings that showed the Westinghouse investment is creating some major costs. But that could change.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

Start line on the highway
Investing

2 No-Brainer Growth Stocks to Buy Now With $5,000 and Hold Long Term

Market conditions today are ideal for growth investing, and two rising stocks are no-brainer buys in November.

Read more »