The Payoff for Investing in Payday Lenders

NEW YORK (TheStreet) -- In the world of finances, the payday lending/check cashing/pawn shop industry is perhaps the most loathed by consumer protection advocates. They charge that this industry preys on the people who can least afford it -- the poor.

That said, investors are learning that the publicly traded companies in this sector can be worthy investments.

This week, the market will get more of an idea of how some of these finance companies are faring when three of them report their latest quarterly earnings. They are Cash America (CSH), and World Acceptance, reporting on Thursday, and DFC Global, reporting on May 1.

One of the largest companies operating in the space is Cash America, which reports on Thursday. It is expected to post earnings per share of $1.37 for the first quarter of 2013. This will be above the $1.30 it posted for the first quarter of 2012.

With a market cap of $1.3 billion, Cash America is the largest of its peers.

An interesting development occurred for this stock in the options market that indicates the bulls are expecting Cash America's earnings for the last quarter to be strong. According to optionMONSTER's Heat Seeker's monitoring program, 2,000 September 50 calls had been purchased for $1.90 to $2.10, as of Friday.

Furthermore, volume was "77 times open interest at the strike, indicating that new money was put to work on the long side," according to optionMONSTER. The total option volume was 37 times greater than average in the session, according to the Heat Seeker, with calls outnumbering puts by more than 1,000 to 1.

The Born to Sell covered call Web site notes that, in general, the more open interest there is, the better because it means there is more liquidity for the call option being traded. "More liquidity means smaller spreads between the bid and ask," according to Born to Sell.

Also interesting about how Cash America has been trading is its sharp rise since November. Between November and March, shares rose about 50%. However, now its shares are trading around levels near the 52-week high.

Could traders see this as a sign that shares are at support and ready to bounce? OptionMONSTER thinks so. I agree with the site in that this week's earnings report release could lead shares to bounce on the news.

Second to Cash America in terms of market cap is World Acceptance Corp. Its market cap is about $1 billion. It reports its fourth-quarter earnings on Thursday and its stock has been on a tear, recently hitting a new 52-week high.

One fear is Cash America and World Acceptance will be hit in the bottom line by the same kind of scrutiny about their lending practices as peer DFC Global.

Earlier this month, DFC lowered its guidance for the current 2013 fiscal year, alerting investors that earnings would come in lower than tin the third quarter of fiscal 2012.

The company's woes stem from lending guidelines taking effect in the United Kingdom that are aimed at preventing payday lenders from making risky loans that have high risks of default. Lenders suchc as DFC Global operating in the U.K. had to begin implementing, and abiding by, new guidelines or lose their licenses to do business in the U.K.

DFC Global, which reports fiscal third-quarter earnings May 1, downplayed its ability to meet the new guideline standards, but admitted that the many of its outstanding short-term consumer loans have become immediately due.

"We believe this transition is causing a temporary 'credit crunch' for consumers in the United Kingdom, many of which currently have multiple short-term loans outstanding," the company said in the statement about lowered guidance. "Consequently, we have already begun to experience increasing loan defaults across our U.K. business."

The steps that officials are taking in the U.K. against these types of businesses are in line with similar steps taken in the U.S.

The most prevalent complaint is against the payday loan industry. Consumers use these companies for financial help between paychecks. Critics charge the businesses can often lead to financial ruin for these consumers because the fees and interest rates charged are substantial.

Consider this: A $500 loan can cost the customer $100. That's $20 per $100 borrowed!

Check-cashing services have also come under fire, although for many people without a bank account they may be the only viable banking option. These consumers have fallen into groups called the "unbanked" or "underbanked" because they don't have the credit needed to open traditional banking accounts.

Since the 2008 financial crisis, more consumers have turned to these payday lenders and check-cashing companies after their credit took hits because of a wide range of factors, including losing homes to foreclosure.

That has helped some of these companies to shed their negative reputations thanks to offering loan and banking services with lower, more reasonable fees. That, in turn, allowed these companies to further increase awareness of their brand names, revenue and value to shareholders.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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