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Baskin Wealth Management letter to clients concerning Home Capital Group

April 24, 2017

 

Dear Baskin Wealth Client:

I am sure you have seen recent articles in the press about Home Capital Group (“HCG”), a stock which we have owned for our clients since 2003. HCG operates as an alternative mortgage lender, and is one of the largest such firms in Canada. The company has been continuously profitable since we have owned it, and we had always admired the company’s management.

Earlier this year the Ontario Securities Commission (“OSC”) took action against the company for failing to make timely disclosure of certain events which affected its business. The OSC’s allegations were released a few days ago, and the company stock was badly hurt, falling as much as 20% in one day. As you know, if you have been a client for any length of time, we do not normally sell into a falling market, nor do we succumb to emotion-driven selling or panic. Nonetheless, we have now liquidated our position in HCG. Our clients realized about $18.11 per share. At the time of sale, our position in Home Capital represented about 0.7% of our clients’ total holdings with us.

Our primary reasons for this decision are our new lack of confidence in the integrity and effectiveness of company management, and the possibility of a lack of confidence in the company’s viability on the part of key financial industry players, and importantly, retail purchasers of company issued savings instruments. If the OSC allegations are true, the company was engaged in an active campaign over a period of months to deceive the investing public as to the true state of affairs at the firm. HCG denies these allegations, but to us, they have the ring of possible truth and are consistent with the facts as we understand them. Certainly, if the allegations are true, we were actively misled by management.

There is no doubt that HCG will be faced with serious challenges in the months ahead. These include class-action lawsuits which have already been launched, the replacement of key senior management, and most important, the re-establishment of a solid level of trust with both institutional and retail investors.  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.

We always tell our clients that before purchasing a security, we form a mental picture of our company name on that firm’s head office. If that picture makes us queasy, we do not proceed with the investment. Sadly, as a result of the new information disclosed in the past few days, we no longer have the necessary comfort level to remain invested in this company.

Yours very truly,

 

David P. Baskin, President