The building housing the headquarters of Home Capital Group is seen in downtown Toronto.CHRIS HELGREN/Reuters
When Warren Buffett makes a move, investors tend to follow.
This is certainly true on Thursday, after Mr. Buffett's Berkshire Hathaway Inc. agreed to take a $400-million position in Home Capital Group Inc., supplying a big shot of confidence in the Canadian mortgage lender.
Less than two months ago, Home Capital announced that it needed emergency funding to offset fleeing deposits. Its share price plunged 65 per cent on the news in late April, raising troubling questions about the health of Canada's housing market and other lenders.
Some investors dumped their Home Capital shares during the swoon, others swooped in on an apparent bargain, while vocal short-sellers gloated over their conviction that market convulsions could only get worse.
Now, with Mr. Buffett's arrival on the scene, Home Capital has a new swagger – and the market is anointing new winners and losers.
Winner: Home Capital Group
The mortgage lender's share price soared 27.2 per cent to $19 on Thursday, reflecting confidence in having Mr. Buffett as an investor. Suddenly, concerns about the health of the company's loan book seemed to vanish, given that the Oracle of Omaha was unlikely to get involved with something icky.
There is one caveat here, though: Mr. Buffett is getting his initial shares at a deep discount of $9.55 each – or 36 per cent below Wednesday's closing price. Like magic, he's already up 99 per cent on his investment.
Do investors care? Not when he furnishes this pithy quote to Home Capital's press release: "Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment."
Winner: True believers
Some investors are attracted to beaten-up stocks that no one else wants – but where there is upside potential. In the case of Home Capital, the bullish argument always rested on the value of its mortgage book: If these mortgages were largely sound, then the company should be worth something close to its book value of about $25 a share.
Taylor Asset Management bought 5 per cent of outstanding shares on the downturn, at an average price of about $8, implying that the investment firm has more than doubled its initial investment.
Others added significantly to their existing positions.
CIBC Asset Management held about 2.5 million shares before Home Capital's deep troubles emerged earlier this year. It increased this holding to 9.5 million shares – representing about 14.8 per cent of outstanding shares.
Turtle Creek Asset Management is Home Capital's biggest shareholder, which looked like a problem when the shares were down in the dumps. But the firm stuck to its commitment by buying additional shares on the cheap. According to regulatory filings, Turtle Creek now owns 12.2 million shares, representing more than 19 per cent of outstanding shares.
Winner: Other mortgage-related stocks
Home Capital's downturn wasn't confined to Home Capital, and nor is its rebound. Investors initially worried that the lender's problems were being exacerbated by a bubbly Canadian housing market – a concern that whacked mortgage lenders, diversified bank stocks and other related companies.
Now, though, markets are breathing big sighs of relief. Equitable Group, a mortgage lender, was up 12.5 per cent on Thursday. Genworth MI Canada Inc., which provides private residential mortgage insurance, was up 11.5 per cent.
As for the banks, Laurentian Bank of Canada and Canadian Imperial Bank of Commerce were up about 1.5 per cent each, while Bank of Montreal and Canadian Western Bank were up 1.2 per cent.
Loser: Panic sellers
When Home Capital's share price collapsed in late April amid a run on its deposits, executive departures and allegations of impropriety from the Ontario Securities Commission, some investors fled the stock.
"There is much hard work to be done, and we cannot know how it will all turn out. Under the circumstances, we believe that the best course of action was to liquidate our holdings," David Baskin, president of Baskin Wealth Management, told his clients in April.
"Although a case can be made for deep value in the stock, the business has failed to demonstrate the qualities and execution we expect. We have exited the investment," Ian Cooke of QV Investors, once Home Capital's third largest investor, said in an April letter to clients.
Loser: Short-sellers
Short-sellers profit when share prices decline, but can lose big when shares rally – and they are losing big now. To be fair, Home Capital was a popular target among some short-sellers when the share price was substantially higher than it is now, implying that these investors continue to nurse large gains on their initial bets.
But rather than call it a day and lock in their gains when Home Capital's share price plunged below $6 in late April, some particularly vocal short-sellers stayed put in the belief that the share price would hit zero. Apparently, some continue to believe this. "It's not me vs him," said short-seller Marc Cohodes in a Twitter post, referring to Mr. Buffett. "It's me vs the facts and my research."
In another post: "WB's body of work has nothing to do with Investing in Frauds. Let's leave it at that.. I am in the Dugout getting a bigger Bat."