One Home Capital Investor Made $15 Million in a Month

Updated on
  • Taylor ‘stuck neck out’ to go long against naysayers
  • He’s vindicated after mortgage lender settled with regulator

Home Capital Said in Talks to Replace Pension Loan

David Taylor heard U.S. hedge funds argue that Home Capital Group Inc. was on the brink of disaster along with Canada’s bubbly housing market. So he bet against them.

Today, the founder and chief investment officer of Taylor Asset Management Inc. is vindicated as a rebound in the stock of the alternative mortgage lender almost doubled his investment in four weeks. Taylor owns about 4 million shares of Toronto-based Home Capital, making him one of the top-five shareholders with the firm’s ex-Chief Executive Officer Gerald Soloway.

Taylor purchased 3.6 million of his shares when they slid to about C$8 ($6) a month ago. Since then, they’ve appreciated 68 percent to C$13.49 as of Thursday morning. His stock, worth C$28.8 million when he bought in May, now fetches C$48.6 million. He also bought when it reached lows of C$6 and C$7, he said, more than doubling that money.

“My clients give me their money to be contrarian and make these bets,” Taylor, who manages about C$1 billion at his firm, said by phone from his office in Toronto. “I stuck my neck out with this company, for what I think was high-risk. I stood up to these short-sellers. They made the wrong bet.”

Taylor bet against a pool of short-sellers, including Marc Cohodes, the private investor and chicken farmer who’d been negative on the stock for more than two years. Taylor also helped pen a May 26 public letter in a Canadian newspaper defending the soundness of Home Capital’s business and urging the federal government to support it. He was bombarded on Twitter by people critical of the company.

“I’m up 30 to 40 points on my short, so he didn’t bet against me," Cohodes said by phone Thursday. Cohodes began shorting the stock when it was at C$53 a share; since then, it has dropped about 75 percent. “I think the company is worthless. The only thing that was settled was the fraud relating to disclosure."

An external spokesman for Home Capital didn’t immediately respond to requests seeking comment.

Biggest Blow

Home Capital’s woes began in 2015 when it announced several dozen external brokers had submitted mortgages with fraudulent income information. After an internal investigation, the company cut ties with the brokers, and said the loans were still performing well. Investors weren’t convinced. The shares tumbled as short sellers pounced, with short interest reaching as much as 60 percent of the float.

The biggest blow came this year. The Ontario Securities Commission alleged April 19 that company executives had misled investors about the extent of the mortgage fraud, pushing the stock down 21 percent the next day, the most in almost two years. It tumbled another 65 percent April 26 after Home Capital unveiled a deal with a pension fund for a financially-punitive credit line.

Before adding to his holdings, Taylor spoke with mortgage brokers, people at the company and others who he said helped allay his fears about the extent of the fraud, the ability of Home Capital to attract financing, and the level of regulator concern -- all part of the short-seller case against the lender.

Home Capital said Wednesday after market hours that it had settled with the OSC for about C$30 million, the majority of which would go toward settling a class action lawsuit with shareholders.

“The most important thing I found out was that the old Home Capital Group is gone. Gerry is gone. Reid is gone,” Taylor said, referring to ex-CEOs Soloway and Martin Reid. “There’s a new board." Lawyers for the two men didn’t respond to requests seeking comment.

“We’re definitely not going to exit our position."

(A previous version of this story was corrected to say Cohodes is a private investor in the fifth paragraph.)

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