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Top 5 Stocks to Buy From a Rebounding Consumer Loan Industry

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Swayta Shah
·9 min read
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The Zacks Consumer Loans industry is bearing the brunt of low interest rates, economic slowdown and weak consumer sentiments. While the economy is gradually reopening, rise in coronavirus cases might hamper business activities again, leading to less demand for consumer loans.

Nevertheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and stimulus packages are likely to provide much needed support. Also, digitization of operations will boost operating efficiency. Capital One Financial Corporation (COF), Ally Financial Inc. (ALLY), Credit Acceptance Corporation (CACC), SLM Corporation (SLM) and Navient Corporation (NAVI) will benefit from these developments.

Industry Description

The Zacks Consumer Loans industry comprises firms that provide mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Prospects of these companies are sensitive to the nation’s overall economic health.

In addition to offering the above-mentioned products and services that help generate interest income, which is an important part of revenues, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery for generating fee revenues.

3 Trends Shaping the Future of Consumer Loan Industry

Asset Quality Gets Support From Stimulus Packages: Since last March, the U.S. administration has been trying to provide financial assistance to individuals in the form of tax breaks and deductions, mortgage forbearance and additional unemployment benefits, among others, through various stimulus packages. Backed by these efforts, along with vaccine breakthrough and subsequent inoculation drive, the economy is expected to further gain momentum in the later part of 2021. Thus, these are expected to help consumer loan providers in not witnessing substantial rise in delinquency rates.

Easing Lending Standards Offer Support: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, credit scores of several consumers have moved higher. This has increased the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet increased demand for loans.

Low Rates and Consumer Sentiment Weigh on Performance: The Federal Reserve cut interest rates to near zero in March 2020 with an aim to support the U.S. economy from coronavirus-induced slowdown. In the January FOMC meeting, the central bank signaled no change in rates in the near term. Also, muted consumer sentiments owing to fears of rising coronavirus cases are likely to hurt loan demand. Thus, growth in net interest margin and net interest income for consumer loan companies is expected to be hampered in the near term.

Zacks Industry Rank Reflects Upbeat Prospects

The Zacks Consumer Loans industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #62, which places it at the top 25% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since August 2020-end, the industry’s earnings estimates for the current year have jumped 54.2%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry vs. Broader Market

The Zacks Consumer Loans industry has underperformed the Zacks S&P 500 composite, while outperforming its own sector over the past two years.

The stocks in this industry have collectively gained 27% over this period, the Zacks S&P 500 composite and Zacks Finance sector have rallied 42.6% and 9.2%, respectively.

Two-Year Price Performance

Industry’s Current Valuation

On the basis of price-to-tangible book ratio (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 1.22X. The highest level of 1.50X and a median of 1.18X are recorded over the past five years.

This compares with the S&P 500’s trailing 12-month P/TBV of 17.08X, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

As finance stocks typically have a lower P/TBV ratio, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 3.72X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

5 Consumer Loan Providers Worth Considering

Capital One Financial: This Zacks Rank #1 (Strong Buy) stock is primarily focused on consumer and commercial lending as well as deposit origination. Headquartered in McLean, VA, the company’s revenue prospects look encouraging on the back of solid credit card and online banking businesses.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Strong growth opportunities in card loans and purchase volumes are expected to support the company’s financials. Further, Capital One boasts a robust balance sheet, which is likely to support its inorganic expansion plans.

Notably, after slashing quarterly dividend by 75% in 2020 based on the Fed’s requirements, Capital One has restored the same at prior level of 40 cents per share. Further, the company authorized a new share repurchase program (which was suspended in 2020) of up to $7.5 billion for 2021, with $500 million for the first quarter.

Its shares have rallied 74.2% over the past six months. The company’s earnings for 2021 and 2022 are projected to grow 129.9% and 22.1%, respectively.

Price and Consensus: COF

Ally Financial Inc.: The company provides a broad array of financial products and services, primarily to automotive dealers and their customers. Further, this Detroit, MI-based company has been diversifying into banking and wealth management services, and is making efforts to enhance digital offerings.

Strong origination volumes, retail loan growth, rise in deposit balances and inorganic growth efforts with an aim to improve product offerings will continue supporting Ally Financial. Also, the company has a strong balance sheet, and its capital deployments remain impressive.

In January, Ally Financial announced a new share repurchase plan. Under this, the company is authorized to buy back $1.6 billion worth of shares in 2021. It is to be noted that the company had suspended buybacks last year to preserve liquidity amid the pandemic.

The company’s earnings for 2021 and 2022 are projected to grow 45.2% and 23.2%, respectively. Moreover, the stock sports a Zacks Rank #1, presently. Shares of the company have jumped 97% over the past six months.

Price and Consensus: ALLY

Credit Acceptance Corporation: Headquartered in Southfield, MI, the company offers financing programs, and related products and services to automobile dealers in the United States, enabling them to sell vehicles to consumers irrespective of their credit history. Also, it is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company.

Despite the current economic slowdown, the company’s finance charges are likely to continue improving supported by rise in demand for auto loans. Further, a decent rise in dealer enrolments and active dealers is expected to support top-line growth.

The company’s earnings are expected to grow 16.2% and 3.4% for 2021 and 2022, respectively. Nonetheless, shares of this Zacks Rank #1 stock have declined 31.6% over the past six months.

Price and Consensus: CACC

SLM Corporation: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. It is focused on catering to private education loans, and providing saving and insurance products for higher education to students and families.

Rising private education loan originations bode well for Sallie Mae. Also, expectation of modest growth in enrolment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company’s prospects.

Shares of this Zacks Rank #1 company have surged 122.2% over the past six months. While its earnings are projected to decline 8.5% in 2021, the trend will likely reverse after that. In 2022, earnings are expected to grow 16.3%.

Price and Consensus: SLM

Navient Corporation: This Zacks Rank #2 (Buy) stock is a leading provider of education loan management and business processing solutions. Headquartered in Wilmington, DE, the company is one of the leading servicers to the U.S. Department of Education under its Direct Student Loan Program.

Focus on introducing new products leveraged with technology, cost control efforts and inorganic expansion strategy will continue supporting Navient in the quarters ahead.

Its shares have rallied 42.6% over the past six months. While its earnings are projected to decline 6.2% this year, the trend will likely reverse after that. In 2022, earnings are expected to grow 2.5%.

Price and Consensus: NAVI

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