From fraud to success: why the house’s capital stock (TSE: HCG) soared 57% today

Home Capital Group (TSE: HCG) the stock is up today, up 57%, following the announcement of its agreement to be taken over by Smith Financial Corp. at a price of CA$44 per share, for a total valuation of CA$1.7 billion. This represents a 63% premium to HCG’s last closing price, and the stock is now up around 9% on the year as a result. HCG has had some interesting years. In 2017, the company was in trouble as investors feared the company was engaging in mortgage fraud (which turned out to be true).

HCG tumbled in the low C$5 range in April 2017 until Omaha Oracle Warren Buffett bailed out the company, sending its stock much higher. He then sold it in 2018. Fast forward to today, and it could be redeemed for C$44. What a turnaround, to say the least.

It is not certain that the HCG will pass; it still requires regulatory approval and the green light of two-thirds of HCG shareholders. In addition, Home Capital Group can seek higher offers until December 30, but there would be a fee of C$25 million or C$50 million if the deal is canceled, which would further incentivize shareholders. of HCG to do so. Additionally, shareholders could receive an additional $0.25 per share for each three months the deal is late if it is not completed by May 20.

The move even sent EQB Inc (EAST: EQB) shares 12% higher; Here’s why. Smith Financial is the holding company of First National Financial (EAST: FN), co-founded by Stephen Smith, who is a major shareholder of EQB. Therefore, EQB is likely rallying due to takeover speculation.

What is the price target for HCG shares?

The price targets have not yet been updated, but we imagine they would reach around C$44/share due to the news. However, even before the news, Home Capital Group’s average stock price target was C$40.20 based on four buys and a hold rating from analysts. From current levels, this represents a downside potential of 5.2%, but the stock still has upside potential if bought at C$44 since its current price is slightly above C$42.

Conclusion: what a turnaround for Home Capital Group

HCG has gone from zero to hero over the past five years. The deal looks likely to go through, but if it doesn’t, HCG’s stock price could drop significantly. Therefore, investors should consider this scenario when considering buying stocks.

Disclosure

Sallie R. Loera