Credit Acceptance Corp. Among Growth Leaders In Subprime Lending Industry

Subprime auto financing specialist Credit Acceptance Corp. NASDAQ: CACC raced 15.74% last week.

The upside action came on news that the company reached a $27.2 million settlement with Massachusetts to resolve claims that it misled its investors and made high-interest loans to borrowers who lacked the ability to repay the money. 

Massachusetts attorney general Maura Healey said the settlement was the biggest of its kind with a subprime auto lender.

As part of the settlement, Credit Acceptance did not acknowledge any wrongdoing.

For their part, investors clearly cheered the result, as it got a monkey off the company’s back. 

That’s not all the stock has going for it, however. The company has been an earnings and revenue champion, beating Wall Street views in each of the past four quarters. 

Earnings grew at double- or triple-digit rates in each of those quarters. Revenue grew at double-digit rates for the past eight. 

For the full year, analysts expect earnings of $51.72 per share, up 120% from 2020. 

Concerns About Future Business?

In Credit Acceptance’s second-quarter earnings call in late July, Raymond Cheesman of Anfield Capital asked whether the company was concerned about a decline in business due to further pandemic- or economic-related fears on the part of consumers.

“I don't think many things in this pandemic have played out as anyone would have thought, so I think there's uncertainty into how things will progress from here. So anything is possible,” said chief treasury officer Douglas Busk. 

Indeed, analysts have a “hold” rating on the stock, with a price target of $379.50, representing a 43.38% downside. Why would investors hold through a correction of that magnitude? For those with a loger-term holding period, a sharp correction naturally offers a chance to add more shares. 

But for investors who would rather use a traditional “buy low, sell high” strategy, waiting for a pullback is a better move, at this point, especially following last week’s strong rally. 

However, even if the stock does pull back to $379.50, that would not undercut the prior structure low of $323.30. In that case, we may see a second-stage base form. A second-stage base can be very constructive, as it’s still early enough in a stock’s gradual run-up to reward investors before a pullback that re-sets the base count. 

Industry Group Strength

Other subprime consumer lenders are also seeing strong stock performance. That’s important, as your investment stands a better chance of rising if its overall industry is also in favor. 

For example, fellow subprime lender Atlanticus Holdings NASDAQ: ATLC has also been a standout price performer, advancing 33.67% in the past month alone, and 143.40% year to date.

Analysts expect strong earnings growth ahead, pegging earnings per share at $7.35 this year, a gain of 86%. For 2022, that’s seen rising another 21% to 8.90 per share.

The company has a long history of topping analysts’ earnings forecasts. 

Regional Management Corp. NYSE: RM, also in the subprime lending business, boasts a year-to-date return of 95.65%. Momentum slowed recently as the stock has been consolidating below its August 4 high of $60.45. 

Despite a strong price performance, this stock is not as sound fundamentally as others in its industry, although analysts see a 79% increase in earnings this year, to $7.38 per share.

Regional Management beat earnings views in each of the past four quarters. 

Of course, no industry stays in favor forever, as rotation is a perfectly normal function of market behavior. That doesn’t mean you have to sell a stock if its industry begins to lag others. However, when hunting for potential leaders, it’s best to avoid the “diamond in the rough” phenomenon and focus on industries where several different stocks are beneficiaries of investor optimism.