Home Capital shares sell off after Berkshire Hathaways discloses it's sold most of its stake

Shares in Canadian mortgage company Home Capital fell as much as 18 per cent on Wednesday after Warren Buffett's company Berkshire Hathaway had sold most of its stake in the company.

News that Buffett has sold most of his stake sends shares down as much as 18%

The Berkshire purchased stabilized Home Capital shares at the time, so word that the company was selling most of its stake sent the company's stock lower on Wednesday. (Cole Burston/Bloomberg)

Shares in Canadian mortgage company Home Capital fell as much as 18 per cent on Wednesday after word came out that Warren Buffett's company Berkshire Hathaway had sold most of its stake in the company.

Home Capital's TSX-listed shares were changing hands at just over $14 on Wednesday, off by more than $2 from Tuesday's close after a press release from the company early Tuesday morning revealed that Berkshire has sold off most of what it owned in the company.

Home Capital was rocked in 2017 by allegations from regulators that the company had misled investors about some of its mortgages, which led to a run on the bank as investors pulled out their money. 

Later that summer, Berkshire stepped up with a $2-billion credit line for the company, and a $400-million equity stake to solidify its finances. Those moves had the desired result, as the stock price recovered to almost $20 a share after plunging below $10 during the lowest point in the story.

Buffett's involvement not only gave Home Capital the money it needed to keep going, but his name lended a degree of confidence to a company that needed it at the time.

The original deal saw Berkshire buy almost 20 per cent of the company for $153 million and Berkshire wanted to increase that to more than 38 per cent by buying even more stock later.

But Home Capital investors rejected that second purchase in a vote late last year largely because the urgency had passed and Berkshire would have been buying those shares at just over $10 each at a time when the company's public shares were trading well higher than that.

Wednesday's press release says that since Home Capital rejected that second stock purchase, Berkshire's stake in the company "is now not of a size to justify our ongoing involvement."

"Although we have decided to substantially exit from our investment, we will continue to cheer from the sidelines for our friends at Home," Berkshire said in the release.

For its part, Home Capital's management thanked Berkshire for their investment at the time but stressed that the company is now ready to stand on its own two feet.

"Home Capital is in an excellent position to continue providing industry-leading service with a strong focus on sustainable risk management," CEO Yousry Bissada said. "Berkshire's investment in Home Capital provided substantive assistance to the company and created stability and value for the company and its stakeholders at a critical time in 2017."

"Since that time, Home Capital has returned to profitability, strengthened its business and made significant progress on its strategy for sustainable growth. Home Capital is grateful to Berkshire for their support while we positioned the Company for long-term success."

Investors didn't respond quite as warmly to the news, however, as Home Capital shares were off as much as 18 per cent on Wednesday. "The Berkshire announcement is likely to dominate the headlines this morning as it does mark the end of an era for HCG," Industrial Alliance analyst Dylan Steuart said, adding that he estimates Berkshire probably still owns about 2.5 million shares in the company, something that could continue to weigh on the stock price as Berkshire slowly sells those shares off in the coming weeks and months.

Steuart has a target price of $22 on Home Capital's shares, meaning he thinks the stock will be worth 33 per cent more a year from now than it is today.

Toronto-Dominion Bank analyst Graham Ryding is somewhat gloomier, with a target price of just $19 a share for the company.

"Losing Berkshire Hathaway as a cornerstone investor is a negative, in our view," he said in a note to clients on Wednesday. "However, we understand Berkshire's position in that the investment is too small currently to justify."


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