Home Capital Survived in 2017
Home Capital investors had a volatile two years. The company almost went bankrupt in mid-2017. Allegations from the Ontario Securities Commission that management misled investors about mortgage fraud within its broker network led to a run on the bank. 95% of its saving accounts deposits disappeared as a result. On May 8th, 2017, HCG fell to as low as C$5.06 in Toronto.
Fortunately, a subsidiary of Warren Buffett’s Berkshire Hathaway stepped in to provide a C$2 billion credit line, preventing a liquidity crunch. Berkshire also acquired 20% of Home Capital’s common stock with the intention to acquire another 20%. This vote of confidence from the world’s greatest investor led the stock price to C$20.75 in June 2017.
However, Buffett was denied the additional 20% by the rest of the company’s shareholders and last month decided to “substantially exit” the investment in the Canadian mortgage lender.
A Bullish Elliott Wave Setup
The stock has been hovering between C$18.60 and C$12.50 since June 2017. While the company’s fundamentals have significantly improved, the market is yet to acknowledge that fact. In order to see if that is going to happen soon, we need to take a look at the situation though the prism of the Elliott Wave Principle.
The 4-hour chart of HCG stock shows that the sideways movement from C$20.75 to C$12.48 looks like a simple A-B-C zigzag with a triangle in wave B. This means the preceding rally from C$5.06 is a motive wave, marked 1.
If this count is correct, the 5-3 wave cycle is complete and Home Capital stock can be expected to accelerate to the upside in wave (iii) of 3 from now on.
The support line drawn through the last two lows managed to discourage the bears for the third time in December, further strengthening the bullish outlook. Home Capital seems to be in a position to reward investors in 2019 and beyond.
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Disclosure: The author holds a long position in HCG stock.