There is one thing to keep in mind if you are considering investing in Home Capital Group Inc.: You are not Warren Buffett.
Mr. Buffett, a legendary investor who attracts copycats with his every move, has agreed to provide financial backing to the beleaguered Canadian mortgage lender, in the form of a $400-million equity investment and a $2-billion line of credit.
Investors love it. Home Capital shares jumped 27.2 per cent on Thursday, closing at $19 – for a gain of 225 per cent from the stock's low point in early May.
The impressive rebound suggests renewed confidence in Home Capital, two months after its share price collapsed amid fleeing deposits that raised questions about the company's ability to survive.
However, while Mr. Buffett's financial backing appears to be a wildly bullish argument in favour of buying Home Capital shares, the deal he has struck cannot be replicated by other investors: If you choose to follow Mr. Buffett, you are not making the same bet.
The deal resembles the one Mr. Buffett struck with Goldman Sachs Group Inc. during some of the darkest days of the financial crisis last decade.
In September, 2008, Mr. Buffett's Berkshire Hathaway Inc. provided a much-needed cash infusion to the Wall Street investment bank.
But this wasn't charity. Mr. Buffett bought $5-billion (U.S.) worth of preferred shares that yielded an astounding 10 per cent annually. In addition, he received warrants that would give him the right to buy 43.5 million Goldman Sachs common shares at $115 each (or $5-billion in total) – giving him an easy profit if the shares rose above this price. And they did.
The deal was heralded as a vote of confidence in Wall Street at a time when many investors were fearful of financial firms, but investors couldn't piggy-back on this exact arrangement. It was a made-for-Buffett deal.
His agreement with Home Capital, also through Berkshire Hathaway, has similar qualities. Yes, Mr. Buffett will become a significant shareholder in the mortgage lender if the deal goes through, which speaks volumes about the perceived quality of the company's loan book.
But Mr. Buffett is getting a few things here that new investors are not. For one, his first investment of about 16 million shares is priced at just $9.55 a share.
That is a 15-per-cent discount to the five-day volume-weighted average price, as Home Capital's press release helpfully points out – and it is a dazzling 36 per cent below Wednesday's close.
Based on Thursday's closing price of $19, new investors who decide to ride on Mr. Buffett's coattails are buying shares that are about 100 per cent higher than Mr. Buffett's sweetheart deal. That's no bargain.
Mr. Buffett is also getting a steep discount on a second investment of about 24 million Home Capital shares. These will be priced at $10.30 each, or 31 per cent below Wednesday's close.
It's nice to be Mr. Buffett, and the benefits don't end with specially priced shares.
Berkshire Hathaway has also agreed to extend a $2-billion line of credit to Home Capital that will pay an interest rate of 9.5 per cent on drawn funds. Try getting that on a fixed-income investment.
Clearly, this deal is good for Mr. Buffett, who stands to double his equity investment the minute the deal goes through (expected later this month).
It's also good for Home Capital, which has found a high-profile investor, a new financial lifeline and the best confidence booster it could hope to get.
But for new investors hoping to tag along with Mr. Buffett, the deal is bitter-sweet. Yes, Home Capital is on safer ground and you might do fairly well if you hold on to your shares for the long run. However, Mr. Buffett is a giant step ahead of you.