Stock sell-off ‘knee-jerk reaction,’ analyst says

Kevin Smith, chair of Home Capital’s board of directors, said in a message to shareholders on Friday that these preliminary, unaudited first-quarter numbers show that the “business is robust.”

He added that Home Capital continues to see “strong volumes and excellent credit quality.”

Smith also addressed the statement of allegations and notice of hearing issued by the OSC against the company, former president and chief executive Martin K. Reid, former president and chief executive and current director Gerald M. Soloway, and chief financial officer Robert Morton.

The OSC, which will hold a hearing on May 4, alleges that Home Capital “misled” shareholders because it knew there was fraud in its broker channel months before the company made a public announcement in July 2015.

“We will continue to vigorously defend our approach to disclosure in the Ontario Securities Commission (OSC) proceeding,” Smith said in the open letter. “While the OSC process may take some time, management and the Board are focused on continued profitable growth and industry leading customer service.”

Jeff Fenwick, an analyst with Cormark Securities Inc. in Toronto, said Home Capital’s pre-announced earnings per share and statement were “encouraging” and indicated that the underlying business operations were on steady ground.

Thursday’s steep sell-off of the stock was a “fear trade, a big knee-jerk reaction to some negative headlines,” he said in an interview.

“You have to step back and realize that, operationally, the business is still functioning,” Fenwick said. “We’re not talking about this business going under.”

The OSC investigation “certainly has some negative connotations to it,” but it is dealing with activities at Home Capital that occurred more than two years ago, he added.

Since 2015, the bulk of those mortgages that were of concern — involving evidence of fraudulent income — have largely rolled off the books, Fenwick said.

Cormark upgraded Home Capital to buy from market perform on Friday, and raised its target price from $25 to $30.

The allegations by the regulator came less than a month after the abrupt departure of Reid, who had taken the helm of Home Capital and replaced longtime CEO Soloway in May last year.

Before issuing the statement of allegations, the OSC had issued enforcement notices in March to several of the mortgage lender’s current and former executives and directors in connection with “disclosure and, in some instances, trades in the company’s shares.”

Home Capital also disclosed last month that a proposed class action had been filed in the Ontario Superior Court of Justice, alleging “misrepresentations” in company public disclosures in 2014 and 2015.