Houses and cars drive the consumer economy

What impresses Barry Schwartz about Gerald Soloway, CEO of Home Capital Group Inc. (HCG–TSX) is his commitment — and, obviously his love of what he does.

After all, Mr. Soloway may be a wealthy CEO, notes Mr. Schwartz, chief investment officer at Toronto-based wealth management company Baskin Financial, but he’ll still go out and see things for himself before his company, which specializes in mortgages, decides to advance money to a homeowner.

Yet Mr. Soloway’s hands-on approach is just one reason Mr. Schwartz likes Home Capital. He also appreciates Mr. Soloway’s commitment to stockholders.

No dilution in shareholder base

Although the company has been around for some time, it still has the same number of shares outstanding as it had 10 years ago, Mr. Schwartz says.

Another Home Capital plus? Its horizons. With the company having only a small piece of Canada’s mortgage market, its  potential for growth is high, says Mr. Schwartz, who notes Home Capital’s mortgages are cheaper than those sold by the banks.

Moreover, given that Canada’s interest rates remain low, a mortgage supplier like Home Capital obviously stands to benefit.

Then, too, Home Capital is now cheap. Although its price-to-earnings ratio is comparatively low, the company boasts a 20 per cent return on equity.

In addition, its earnings have grown at a compound rate of more than 15 per cent a year for more than a decade.

Not surprisingly, Mr. Schwartz considers Home Capital Group as a best buy.

For the three months ended June 30, Home Capital’s net income rose to $73.7 million or $1.05 a share, from $61.6 million, or $0.88 a share, for the similar period in 2013.

Total revenue rises 9.8 per cent

Total revenue was also up, rising to $255.4 million from $232.6 million while return on shareholders equity fell to 23.1 from 23.6 per cent. But return on average assets inched up to 1.4 from 1.3 per cent.

For the six months ended June 30, Home Capital’s net income climbed to $143.5 million or $2.04 a share, from $121.3 million, or $1.74 a share, for the similar period in 2013.

Total revenue, not surprisingly, was also higher, jumping to $503.3 million from $463.7 million, while return on shareholder equity slipped to 23 from 23.8 per cent. Return on average assets, meanwhile, rose to 1.4 from 1.3 per cent.

Mr. Schwartz may have a soft spot for a company like Home Capital Group that enables Canadians to buy homes.

 But he also likes an outfit such as Magna Intl. Inc. (MG–TSX) that makes the parts for the cars that go with those homes.

For one thing, Mr. Schwartz says, Magna is also a bargain, having recently seen its shares tumble by almost 30 per cent.

Moreover, as an auto parts maker, it’s in the right place at the right time, given the pent-up demand for cars in both Canada and the U.S.

In fact, Mr. Schwartz says, the average car in the North American household is now 11 years old.

And with the North American economy likely to improve steadily, consumers will be that much more willing to replace their clunkers with new models.

Company is well-entrenched

In addition, Magna is well-entrenched, given that it supplies parts to North America’s big-three auto makers, as well as to their Asian counterparts, says Mr. Schwartz.

He also notes the company is poised to take advantage of rising car sales in both China and Latin America — regions where auto ownership per capita is still comparatively low.

Yet another Magna plus is its strong balance sheet. Not only does it have no debt, but it’s using its free cash flow to buy back stock, as well as make acquisitions and open new factories.

And because the company is undervalued, it’s effectively a growth story, but at a reasonable price.

For Mr. Schwartz, Magna Intl. is also a best buy.

For the three months ended June 30, Magna’s net income increased to US$510 million or $2.32 a share, from $415 million, or $1.78 a share, for the similar period in 2013.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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