With the S&P 500 Index surging past 4,500 points, it’s time to take a look at one of its best performing sectors, which is consumer loans. The performance of Zacks’ consumer loans sector with a cumulative return of 48.1% is impressive. During the same period, the S&P 500 Index gained 21.8%.
Zacks’ Consumer Loans Industry is a group of 19 stocks within the larger Zacks Finance industry. The industry currently holds a Zacks Industry Rank # 57, which places it in the top 23% of over 250 Zacks industries.
Although last year the pandemic crippled business activities globally and locked people inside for months as governments imposed stay-at-home orders everywhere, the economy is now reopening. and takes an encouraging momentum. This is evidenced by the increase in real gross domestic product (GDP) at the rate of 6.3% and 6.6% in the first and second quarters of 2021, respectively. President Joe Biden’s heavy pandemic relief program and large-scale vaccination programs across the United States have been helping this recovery process for some time now.
The near-term outlook looks bright as the continued improvement in the domestic economy and strong economic data will continue to support demand for student, auto and card loans. Improving consumer confidence, falling unemployment rates and increasing disposable income are expected to boost the performance of consumer credit securities over the coming period. These factors are also expected to slightly increase demand for mortgages.
TransUnion data for the second quarter of 2021 points to a strong resurgence in the auto, credit card, personal loan and mortgage industries. We expect all financial institutions to see similar trends in the near term as well, provided COVID-19 cases decline steadily, reopening plans remain in place, and consumer spending levels remain robust. Even the Fed data reflected a similar upward trend in the second quarter of 2021 for consumer credit cards, student loans and auto loans.
An increase in auto lending in the June quarter despite rising vehicle prices due to supply shortages suggests and the rise in lending is expected to gain ground in the coming period, aided by strong consumer resilience and optimistic sentiment surrounding the economic recovery.
Consumer credit card defaults are at historically low levels and mortgage lending activity in the country is on the rise. Refinancing exceeds purchase volumes as consumers take advantage of extremely low rates.
While new home buying activity is still strong, rising house prices could exclude some borrowers from the market. The appreciation in home values has propelled mortgage balances to record highs and we expect origination volumes to remain strong in the near term. Easing credit standards helps consumer loan providers meet high demand for loans.
The Federal Reserve cut interest rates to near zero in March 2020 in an effort to pull the US economy out of the coronavirus-induced downturn. However, at the FOMC meeting in June, officials pointed out in their so-called “dot-plot” that there could be two rate hikes by the end of 2023. Thus, the growth in the margin Net interest income as well as the net interest income of consumer credit companies are expected to improve over the next few quarters.
Despite a number of lingering concerns including mutations in the coronavirus, the aforementioned findings are creating optimistic feelings among consumers. Thus, these favorable winds should help consumer loan providers see an improvement in delinquency rates.
So now is a good time to add a few consumer loan stocks to your investment portfolio, which will help generate healthy returns going forward.
3 consumer credit stocks to bet on
We focused on three consumer loan stocks within the broad universe of stocks. These stocks are currently Zacks # 1 (strong buy) or 2 (buy) and have risen over 40% in the year so far. You can see The full list of today’s Zacks # 1 Rank stocks here.
Based on the above criteria, we have chosen Ally Financial Inc. ALLY, Credit acceptance company CACC and Global Acceptance Company WRLD.
Before we discuss the fundamental strengths and outlook for these stocks, let’s take a look at the chart showing how the stock price of these companies has changed since the start of the year.
Image source: Zacks Investment Research
Credit acceptance company: Headquartered in Southfield, MI, the company provides financing programs and related products and services to auto dealers in the United States, enabling them to sell vehicles to consumers regardless of their credit history. In addition, it reinsures coverage under vehicle maintenance contracts sold to consumers by dealers on vehicles financed by the company.
As the economy reopens and recovers, the company’s financial charges are expected to continue to improve, supported by increased demand for auto loans. In addition, a decent increase in dealer registrations and more active dealers should support revenue growth. The company’s consistent capital deployments are commendable, as it will continue to improve its shareholder value.
Credit Acceptance’s profit estimates have moved 24% north to 2021 in 60 days, indicating a 108.9% increase from the figure released a year ago. Likewise, the 2022 profit estimates were also revised upward by 2.1% over the same period. The stock currently sports a Zacks Rank # 1.
Global Acceptance Company: It operates like a small loan consumer credit business. The Company offers short-term small payment loans, medium-term larger payment loans, related credit insurance, and ancillary products and services to individuals. It also offers tax preparation services to its lending clients and other individuals.
It is well positioned to take advantage of the favorable imbalance of supply and demand in the area of non-senior loans. With loan and credit growth moving in the right direction, World Acceptance’s strong cash flow has enabled its operations with low leverage. The company offers simple and attractive products to an underserved clientele, focusing on the stability, ability and willingness of each client to repay loans. No state has a lending concentration greater than 21%, thus describing a geographic diversification of lending. That aside, his detailed underwriting skills coupled with a robust collection process have led to rapid portfolio growth in recent years.
Profit estimates have been revised up 24.9% and 29.5% for 2021 and 2022, respectively, over the past two months. Additionally, the stock currently displays a Zacks rank of 1.
Allied financial: The company offers a wide range of financial products and services, primarily to auto dealers and their customers. The Detroit, Michigan-based company is diversifying into mortgage and wealth management services, and working to improve its digital offerings. The acquisitions of TradeKing and Health Credit Services (a point-of-sale payment provider) will likely help improve its product portfolio.
Strong origination volumes, growth in retail loans, rich deposit balances and inorganic growth efforts to enrich its product menu will continue to increase Ally Financial’s prospects. In addition, the company’s strong balance sheet and strong capital deployments are its main catalysts.
Zacks’ consensus estimate for 2021 earnings rose 26% north to $ 8.18 in two months. This implies an increase of 169.97% compared to the figure reported a year ago. Likewise, the consensus estimate of 2022 profits has been revised upwards by 12.3% over the same period. The stock currently carries a Zacks Rank # 2.
Technological IPOs with huge profit potential: Last year, major IPOs jumped 299% in the first two months. With record amounts of cash flowing in IPOs and a record stock market, this year could be even more lucrative.
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