Boost Your Portfolio With These Top 3 Consumer Loan Stocks

Hafiz N Nayla

With the S&P 500 Index surpassing 4,500 points, it is time to take a look at one of its well-performing sectors, which is Consumer Loans. Performance of the Zacks Consumer Loans industry with a year-to-date return of 48.1% is turning out to be impressive. Over the same time frame, the S&P 500 Index has rallied 21.8%.

The Zacks Consumer Loans industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #57, which places it in the top 23% of more than 250 Zacks industries.

Although last year, the pandemic had put business activities on a grinding halt, globally, and locked people indoors for months as governments everywhere imposed stay-at-home orders, the economy is now reopening and gaining an encouraging momentum. This is evidenced by the real gross domestic product’s (GDP) increase at the rate of 6.3% and 6.6% in the first and second quarters of 2021, respectively. President Joe Biden’s hefty pandemic-relief package and large-scale vaccination programs across the United States have been aiding this recovery process for a while now.

Near-term prospects look bright as the steadily improving domestic economy and robust economic data will continue to buoy demand for student, auto and card loans. Improving consumer confidence, lower unemployment rate and higher disposable income are likely to drive the performance of consumer loan stocks in the upcoming period. These factors should slightly raise demand for mortgage loans too.

TransUnion’s second-quarter 2021 data signals a strong resurgence across auto, credit card, personal loan and mortgage. We expect all financial institutions to see similar trends in the near term as well, provided the COVID-19 cases steadily drop, reopening plans remain and consumer spending levels stay robust. Even the Fed’s data mirrored a similar uptrend in the second quarter of 2021 for consumer credit card, student loans and motor vehicle loans.

An increase in auto loans during the June quarter despite a rise in vehicle prices due to supply shortages suggest and the rise in loans is likely to gain traction in the upcoming period, aided by a firm consumer resilience and upbeat sentiment surrounding the economic recovery.

Consumer credit card defaults are at historical lows and mortgage-origination activities in the country are steering through. Refinancing is surpassing purchase volumes as consumers are capitalizing on the extremely low rates.
Although the new home purchase activity is still sound, rising home prices could be pricing some borrowers out of the market. The appreciation in home value boosted mortgage balances to record highs and we expect origination volumes to remain healthy in the near term. Easing credit-lending standards are helping consumer loan providers meet solid demand for loans.

The Federal Reserve cut interest rates to near zero in March 2020 with an aim to bail the U.S. economy out of the coronavirus-induced slowdown. However, in the June FOMC meeting, the officials had pointed out in their so-called “dot-plot” that there might be two rate hikes by 2023-end. Thus, growth in the net interest margin as well as the net interest income for the consumer loan companies is expected to improve in the upcoming quarters.

Despite a number of lingering concerns including the coronavirus mutations, the above-mentioned findings are creating optimistic sentiments amid consumers. Thus, these tailwinds are expected to help the consumer loan providers witness an improvement in the delinquency rates.

So, this is an opportune time to add a few consumer loan stocks to your investment portfolio that will help generate healthy returns going forward.

3 Consumer Loan Stocks to Lay a Wager on

We zeroed in on three consumer loan stocks from the vast universe of stocks. These stocks presently have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and rallied more than 40% in the year so far. You can see the complete list of today’s Zacks #1 Rank stocks here.

Based on the aforementioned criteria, we chose Ally Financial Inc. ALLY, Credit Acceptance Corporation CACC and World Acceptance Corporation WRLD.

Before we proceed to discuss these stocks’ fundamental strengths and prospects, let’s take a look at the chart showing the year-to-date share price movement of these companies.

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Image Source: Zacks Investment Research

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 the vehicle service contracts sold to consumers by dealers on  vehicles financed by the company.

With the economy re-opening and gathering steam, the company’s finance charges are likely to continue improving, supported by a rise in demand for auto loans. Further, a decent spurt in dealer enrolments and higher active dealers are expected to support top-line growth.The company’s steady capital deployments are laudable, through which it will keep enhancing its shareholder value.

Credit Acceptance’s earnings estimates have moved 24% north for 2021 in 60 days’ time, indicating an increase of 108.9% from the year-ago reported figure. Likewise, the 2022 earnings estimates have also been revised 2.1% upward over the same time frame. The stock sports a Zacks Rank #1, currently.

World Acceptance Corporation: It operates as a small-loan consumer finance business. The company provides short-term small installment loans, medium-term larger installment loans, related credit insurance, and ancillary products and services to individuals. It also offers income-tax return preparation services to its loan customers and other individuals.

It is well-positioned to leverage the favorable supply and demand imbalance within the non-prime lending arena. With loan growth and credit trending in the right direction, World Acceptance’s strong cash flows permitted its operations at low leverage levels. The firm imparts simple and alluring products to an underserved customer base, zooming in on the particular customer’s stability, ability and willingness to pay back the loans. No state has greater than a 21% loan concentration, thereby portraying loan diversification, geographically. This apart, its detailed underwriting skills coupled with a robust collection process led to rapid portfolio growth in recent years.

Earnings estimates have been revised 24.9% and 29.5% upward for 2021and 2022, respectively, in the past two months. Also, the stock flaunts a Zacks Rank of 1, presently.

Ally Financial: The company provides a broad array of financial products and services, primarily to automotive dealers and their customers. This Detroit, MI-based company is diversifying into mortgage business and wealth management services, and making efforts to enhance its digital offerings. The acquisitions of TradeKing and Health Credit Services (a point-of-sale payment provider) will likely help improve its product pipeline.

Strong origination volumes, retail loan growth, rich deposit balances and inorganic growth endeavors with an aim to enrich its product menu will continue to bump up Ally Financial’s prospects. Also, the company’s balance-sheet strength and sturdy capital deployments are its key catalysts.

The Zacks Consensus Estimate for 2021 earnings has moved 26% north to $8.18 in two months’ time. It implies a surge of 169.97% from the year-ago reported figure. Likewise, the consensus estimate for 2022 earnings has been revised 12.3% upward over the same time frame. The stock carries a Zacks Rank #2, presently.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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