In this article we analyze the 10 best consumer finance stocks to buy now. The consumer finance industry suffered in 2020 amid a decline in consumer spending. However, analysts see a sharp rebound in 2021 and beyond as the world comes back to normal. To skip ahead our discussion of the reasons you should invest in consumer finance stocks, click to see the 5 Best Consumer Finance Stocks to Buy Now.
As public distrust in major banks grows amid an increased likelihood of a global recession following the coronavirus pandemic, the consumer finance sector is thriving. The rapidly changing consumer habits in borrowing and managing finances is also proving to be a tailwind for consumer finance companies in the U.S. People use consumer finance companies for credit cards, receiving loans for cars, education and housing. The consumer finance sector got hammered by the coronavirus pandemic as people restricted spending and borrowing. But signs of recovery are already here. According to a report by Deloitte, personal consumer expenditure jumped 8.9% in the third quarter on a year-over-year basis. The report noted that spending in the third quarter was surprisingly upbeat despite the withdrawal of $600 weekly supplements for unemployment insurance.
Growth Catalysts for Consumer Finance in 2021
In a December 2020 report, consumer credit reporting company TransUnion (NYSE:TRU) said that personal loans and the use of credit cards will post a strong rebound in the first half of 2021 amid an expected improvement in macroeconomic factors such as unemployment and GDP. The report estimates that credit card originations will jump 64% year over year in the first half of 2021. The report also forecasts a rise in the demand of unsecured installment loans as people prepare for vacations, travel and other expenses. In the first quarter, loan volumes are expected to reach 3.3 million, while second-quarter loan volumes are estimated to touch 4.2 million, above the 2.6 million mark observed in the second quarter of 2020. Auto loans are also expected to rebound and the massive declines experienced in the auto sector in 2020 are estimated to flatten in the New Year. Auto loans origination activity in the first and second quarter is estimated to generate 6.8 million and 7.4 million new accounts, respectively.
Despite all the growth catalysts, consumer finance stocks remain a long-term play. You can expect massive defaults in 2021 as deferral and forbearance programs enforced by the government following the coronavirus pandemic come to end. Consumer finance companies will be racing to claim their money from the borrowers. But the fact remains that life will come back to normal and people will start borrowing money to spend on health, education, entertainment and housing. Data shows that transaction value in the marketplace lending (consumer) segment is expected to reach $22.46 billion in 2021.
Another growth catalyst for the consumer finance stocks in the near future is digitization of the sector. According to ComScore, about 60% of the total Internet population in the U.S. uses websites of the top 20 financial institution sites. Mobile banking is also increasing in the U.S. and abroad. These trends will create more opportunities for the consumer finance companies to expand their customer base. Another important and emerging trend in the industry is point-of-sale (POS) financing. A McKinsey report said that the total US outstanding balances originated through POS installment lending solutions totaled $94 billion just in 2018. These trends will increase revenues and growth of the best consumer finance stocks in 2021 and beyond.
It’s extremely important to do your research before investing your money as the financial markets are becoming volatile. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
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Let’s dig deeper and see the 10 best consumer finance stocks to buy now. Our ranking criteria takes into account the hedge fund sentiment, fundamental economic health and growth outlook for the top consumer finance companies.
Lending Club is first peer-to-peer lending company to register its offerings as securities with the SEC. As of the end of 2015, the company reported $15.98 billion in loans. In December 2020, Lending Club shares rallied after the Office of the Comptroller of the Currency approved the company’s acquisition of Radius Bancorp. In the September quarter, the company reported a non-GAAP EPS of $0.25, beating the analysts’ forecasts by $0.31. Revenue in the quarter came in at $74.7 million, above the forecasts by $16.6 million
A total of 13 hedge funds in our database held stakes in Lending Club as of the end of the third quarter. Catherine D. Wood’s ARK Investment Management owns 7,487,851 shares of the company, worth $35.27 million.
Nelnet is a Nebraska-based financial services and lending company that primarily deals in student loans and education financial services. In 2018, the company bought Great Lakes Educational Loan Services, Inc, creating the largest servicer of student loans in the U.S. In November 2020, the company increased declared a quarterly dividend of $0.22 per share, a 10% increase from prior dividend of $0.20. For the third quarter, the company reported a non-GAAP EPS of $1.79 in-line with the Street’s estimates. Revenue in the quarter totaled $306.82 million, a 7.4% jump on a year-over-year basis.
Adam Peterson’s Magnolia Capital Fund owns 1,576,633 shares of Nelnet as of the end of the third quarter, having a total worth of $94.99 million. A total of 13 hedge funds tracked by Insider Monkey reported owning stakes in the company entering the fourth quarter.
Santander is a Texas-based financial services company that offers several financial services, including retail banking, mortgages, corporate banking, cash management, credit card, capital markets, trust and wealth management. In the third quarter, Santander posted a net income of $490 million, or $1.58 per diluted common share.
A total of 20 hedge funds tracked by Insider Monkey held long positions in Santander as of the end of the third quarter. The total worth of these stakes is $429.49 million. Snehal Amin’s Windacre Partnership owns 14,026,500 shares of the company, having a total worth of $255.14 million.
FirstCash is a Texas-based company that offers pawn loans. A pawn broker offers secured loans to people, using personal property or items as collateral. The company over 2,700 retail pawn and consumer lending locations across North America. Jim Simons’ Renaissance Technologies owns 1,066,586 shares of the company, having a total worth of $61.02 million.
Overall, of the 816 elite hedge funds tracked by Insider Monkey, 21 held stakes in FirstCash entering the fourth quarter. The total value of these investments is $168.32 million.
Heartland Advisors said the following about FCFS in its Q3 investor letter:
“Stringent regulations and a low rate environment have created an undifferentiated landscape in the Banking industry. In response, the team continues to focus on identifying standout institutions that can benefit from management initiatives or serve untapped markets. For example, we added to our stake in First Cash Financial Services, Inc. (FCFS), a pawn store operator with locations in the U.S. and Latin America.
Shares of First Cash Financial were down as COVID-19 fears roiled the markets earlier this year. The stock has continued to languish based on concerns that additional stimulus checks will erode future demand for pawn loans. Our thesis is that unemployment will remain elevated and political compromise is unlikely before the Presidential election and thus demand for pawn loans will increase near-term.”
Credit Acceptance Corporation is a Michigan-based company that mainly deals in automobile loans. The company operates lends advance money to automobile dealers in exchange for the right to service the underlying consumer loans and buy consumer loans from automobile dealers. In the third quarter Credit Acceptance reported an adjusted EPS of $9.36 on a revenue of $426.5M, both above the Wall Street estimates.
A total of 29 hedge funds tracked by Insider Monkey reporting owning Credit Acceptance shares entering the fourth quarter. Bo Shan’s Gobi Capital leads these funds with 570,497 shares of the company, worth $193.19 million. Giverny Capital talked about CACC in detail in its latest investor letter:
“Credit Acceptance offers automobile financing programs to car dealers who sell to financially struggling customers. A Credit Acceptance borrower in many cases has been rejected by every other subprime lender for a car loan, and literally has no other options for financing a used car. The borrower is so shaky that when pandemic first struck in March, one prominent short seller predicted Credit Acceptance would go bankrupt. Instead, government stimulus stabilized the market. Credit Acceptance’s stock reached an all-time high of $539 in August.
Credit Acceptance loans people money on punitive terms. The customers are often buying from sketchy car lots and may overpay for clunker autos, which they then finance at high cost. Some of them will end up defaulting on their loans, and when they do, their lender proves a tough adversary, pressuring borrowers to keep paying even if their car is not running.
We’ve owned this stock personally for some years and have met management several times. We think management is responsible and note that Credit Acceptance is a regular member of Fortune magazine’s 100 Best Places to Work list. Customers who pay off their loans rebuild their credit when no one else would loan to them and the investors who put their capital at risk earn good returns in a volatile segment of lending that is known more for failure than success.
Over the years, numerous critics have assailed Credit Acceptance for exploiting vulnerable borrowers. In September, it was sued by the state of Massachusetts. The stock plunged after the suits were filed and on Sept. 30 it closed at $338, down $200 in a month. Lawyers will have no trouble finding sympathetic borrowers who felt pressured to pay off loans on awful cars. The defense may have a harder time persuading a jury that because most of those borrowers had a history of defaults on other loans, they could not have financed a car without a lender willing to take significant risk. If Credit Acceptance is prosecuted or legislated out of its niche, it seems unlikely that its borrowers will find better alternatives.
In early October, Credit Acceptance disclosed in a regulatory filing that its loan collections this year are above expectations and that it may raise money in a debt offering. We notice that the company’s debt is stable and trading above par; it appears to have ample access to low-cost funding. The credit market is calmer about this situation than the stock market, in other words.”
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Disclosure: None. 10 Best Consumer Finance Stocks To Buy Now is originally published at Insider Monkey.
