With the S&P 500 index surpassing 4,500 points, it’s time to take a look at one of its high-performing sectors, consumer credit. The performance of the Zacks Consumer Loans industry with an annual return of 48.1% is proving to be impressive. Over the same period, the S&P 500 index rose 21.8%.
The Zacks Consumer Loans industry is a group of 19 stocks within the broader Zacks Finance sector. The industry currently has the Zacks Industry Rank # 57, which puts it in the top 23% of more than 250 Zacks industries.
Although the pandemic stalled business worldwide last year and locked people in closed rooms for months as governments everywhere imposed stay-at-home orders, the economy is now opening again and gaining encouraging momentum. This is evidenced by the increase in real gross domestic product (GDP) with a rate of 6.3% and 6.6% in the first and second quarters of 2021, respectively. The extensive pandemic aid package from President Joe Biden and large-scale vaccination programs in the USA support this Recovery process for some time.
The near-term outlook is good as the steadily improving domestic economy and robust economic data will further fuel demand for student, auto and card loans. Improved consumer confidence, lower unemployment and higher disposable income should drive consumer credit stocks over the coming period. These factors should also increase the demand for mortgage loans slightly.
TransUnion’s data for the second quarter of 2021 signals a strong resurgence in the auto, credit card, personal loan and mortgage sectors. We anticipate all financial institutions will see similar trends in the short term, provided COVID-19 cases steadily decline, reopening plans remain in place, and consumer spending levels remain robust. Even the Fed’s data reflected a similar upward trend for consumer credit cards, student loans, and car loans in the second quarter of 2021.
A spike in auto loans in the June quarter despite a spike in vehicle prices due to supply shortages suggests that credit surge will pick up pace in the coming period, aided by firm consumer resilience and optimistic sentiment about the economy Recreation.
Consumer credit card defaults are at an all-time low and mortgage lending in the country is in full swing. The refinancing exceeds the purchase volume as consumers benefit from the extremely low interest rates.
While new construction activity remains solid, rising home prices could drive some borrowers out of the market. The rise in home value pushed mortgage balances to record highs and we expect issuance volumes to remain solid in the near future. Easing lending standards is helping consumer credit providers meet solid credit demand.
The US Federal Reserve cut interest rates to near zero in March 2020 to rescue the US economy from the slowdown caused by the coronavirus. At the FOMC meeting in June, however, officials had indicated in their so-called “dot plot” that there could be two rate hikes by the end of 2023. Therefore, net interest margin growth as well as net interest income of consumer finance companies is expected to improve in the coming quarters.
Despite a number of lingering concerns, including the coronavirus mutations, the above results keep consumers feeling optimistic. Hence, this tailwind is expected to help consumer credit providers improve default rates.
So now is a good time to add some consumer credit stocks to your investment portfolio that will help generate healthy returns going forward.
3 consumer credit stocks to bet on
We focused on three consumer credit stocks from the vast equity universe. These stocks are currently ranked # 1 (strong buy) or Zacks 2 (buy) and have gained more than 40% year-to-date. You can see the full list of current Zacks # 1 Rank stocks here.
Based on the above criteria, we chose Ally Financial Inc. ALLIES, Credit acceptance company CACC and World adoption society WRLD.
Before we discuss the fundamental strengths and prospects for these stocks, let’s take a look at the graph that shows these companies’ price movements since the start of the year.
Image source: Zacks Investment Research
Credit Acceptance Company: Headquartered in Southfield, MI, the company offers auto dealers in the United States financing programs and related products and services that enable them to sell vehicles to consumers regardless of their credit history. It is also active in reinsurance coverage under vehicle service contracts that are sold to consumers by dealers for vehicles financed by the company.
As the economy re-opens and picks up pace, the company’s financing costs are likely to continue to improve, aided by increasing demand for car loans. In addition, a decent increase in dealer registration and more active dealers is expected to support sales growth. The company’s constant investment of capital is commendable, which will further increase its shareholder value.
Credit Acceptance’s earnings estimates have shifted 24% north in 60 days for 2021, an increase of 108.9% over the previous year. Likewise, earnings estimates for 2022 have been revised upwards by 2.1% over the same period. The stock currently ranks # 1 in Zacks.
World adoption society: It is a small credit business for consumer finance. The company offers private individuals short-term small installment loans, medium-term larger installment loans, related credit insurance and complementary products and services. It also offers its credit customers and other private individuals services for preparing income tax returns.
It is well positioned to offset the favorable supply and demand imbalance in the non-prime credit space. With credit growth and development moving in the right direction, World Acceptance’s strong cash flows allowed it to operate with a low level of leverage. The company provides simple and enticing products to an underserved customer base, with a focus on the stability, ability and willingness of each customer to repay the loans. No state has credit concentration greater than 21%, which is a geographic representation of credit diversification. That being said, his in-depth underwriting skills coupled with a robust collections process have resulted in rapid portfolio growth over the past few years.
Earnings estimates have been revised upwards by 24.9% and 29.5% respectively over the past two months for 2021 and 2022. The stock also currently has a Zacks rank of 1.
Allied finances: The company offers a wide range of financial products and services, primarily for automobile dealers and their customers. Headquartered in Detroit, MI, this company is diversifying into the mortgage and wealth management sectors and striving to improve its digital offerings. The acquisitions of TradeKing and Health Credit Services (a point-of-sale payment provider) are likely to help improve its product pipeline.
Strong issuance volumes, retail loan growth, rich deposit holdings and inorganic growth efforts aimed at enriching the product offering will further improve Ally Financial’s prospects. The company’s balance sheet strength and solid capital employed are also the most important catalysts.
The Zacks Consensus Estimate for 2021 has moved 26% north to $ 8.18 in two months. This means an increase of 169.97% compared to the previous year. Likewise, the consensus estimate for 2022 profits has been revised upwards by 12.3% over the same period. The stock currently ranks # 2 in Zacks.
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The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.