Validea's pick of the week provides a detailed report on a company that scores well in the stock-screening service's model portfolios. On Validea.ca, investors can analyze 1,000 Canadian stocks through 12 different guru-based models and get individual reports on each company. Globe Investor has a distribution agreement with Validea.ca. Try it. Globe readers can get a limited-time 25-per-cent discount.
Let's dig in to Home Capital Group Inc., a company with a $2.1-billion market cap that receives high marks from multiple fundamental models, including strategies based on Warren Buffett and Peter Lynch.
The Toronto-based firm operates through subsidiary Home Trust Company, which offers deposit, mortgage lending, retail credit and credit card issuing services.
S&P recently lowered HCG's bond rating to BBB-, citing economic headwinds that could affect the banking system as well as industry-specific risks like increasing competition for loans and deposits. But HCG shares are cheap, according to Validea Canada, which runs a series of models based on the strategies of investing legends.
Home Capital gets strong interest from Validea's Warren Buffett-based model, thanks to having upped EPS in every year of last decade; 28 per cent average 10-year return on equity; $6.37 in free cash flow per share; and 10.2 per cent earnings yield.
Even better, it also gets a 93 per cent score from the Lynch model, which would consider HCG a "fast-grower." It scores a passing grade in two key variables outlined below.
In this particular case, the P/E/G ratio for HCG (0.47) is very favourable. The investor should examine the P/E (9.74) relative to the growth rate (20.92 per cent), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price.
EPS GROWTH RATE:
The EPS growth rate for HCG is 20.9 per cent, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good. This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This variable likes to see earnings growth in the range of 20 per cent to 50 per cent, as earnings growth over 50 per cent may be unsustainable.
Click here to read full report for a detailed breakdown.