It was another tough year for publicly-traded stocks in the underbanked sector.
At the end of each year, I create a portfolio of underbanked firms (list below). The list changes, both in its count and its content, because the sector itself keeps changing. In 2013, an index of thirty companies increased their market capitalizations by more than 30 percent. But beginning in 2014, that dynamic reversed itself. In the first six months of that year, my index fell by 1.6 percent. In 2015, the index dropped by 4.8 percent.
This year, the index includes these services:
- prepaid cards
- payday and high-cost consumer installment loans
- credit insurance
- non-bank business lending
- pawn shops
- money transmitters
- structured settlements
- tax preparers offering bank products
I would have liked to have added chattel lenders, but I could not find any publicly-traded companies in that space.
A loss of 4.8 percent is significant. By comparison, the S&P 500 was relatively flat. In terms of outstanding equity, shares fell about 9/10ths of one percent, but when accounting for cash flows for dividends, investors saw marginal gains of approximately one percent. It is the exception to the rule that underbanked stocks pay a dividend, but the sector still conforms to the larger pattern around dividends; only companies with earnings pay dividends. While the majority of underbanked firms retreated, investors in those that paid dividends had positive returns in 7 of 10 instances. The dividend payers tended to be larger. While one-third of the companies in the index paid a dividend, those institutions represented approximately 5/8ths of the value of outstanding equity.
The principle behind it is the same, nonetheless. For those of us who are concerned with the issue of the underbanked, it should be informative. Certainly, it is a review unlike any other end-of-year stock roundup story.
More than $2.3 billion in value was lost. Of those 30 stocks, the average decline was 16.1 percent.
The biggest loser was J.G. Wentworth. Their shares fell from $39 to just $1.80, perhaps because their main line of business fell under a lot of unwanted scrutiny. But as their website attests, J.G. Wentworth is "more than just structured settlements." While those settlements are still their primary activity, they also broker short-term high-cost installment loans, originate mortgages, and manage a prepaid card. Their business lending division, which serves business owners with credit scores of as low as 500, will extend up to $250,000 in financing to companies with more than $100,000 in revenues.
Winners included prepaid card bank issuers, buy-here-pay-here financiers, and some higher-cost lenders. Credit Acceptance gained $1.6 billion in market value over the course of 2015. MetaBank, B of I Federal, and MB Financial all had positive results as well. H&R Block sold its bank during 2015, but it was also profitable for its investors. The Bancorp, having suffered from troubles associated with its financial accounting, fell by more than forty percent.
The next indication of how analysts view the prospects for this field will come when Elevate completes its initial public offering of shares. For now, how you think of the valuations depends on in part on how you see the future growth prospects for the industry. While the overall price-to-earnings ratio in this sector is relatively high (19.7), it still lags the multiple associated with stocks in the iShares S&P 500 growth index (23.2). But growth may not be the right point of comparison for the underbanked field. Most of the value in this space comes from larger dividend-paying companies in relatively mature areas like auto finance, money services, and payday lending. The P/E for the Dow 30 is 18.4. The iShares Core S&P Total US Stock Market ETF is currently valued at 18.6 times earnings.
- Credit Acceptance, up 57.3 percent
- MB Financial, up 45.1 percent
- MetaBank, up 30.5 percent
- Cash America, up 28.2 percent
- Conn's, up 24.8 percent
- Assurant, up 17.5 percent
Lowest-performing (after J.G. Wentworth):
- Enova, down 71.1 percent
- Rent-A-Center, down 59 percent
- EZCorp, down 57.9 percent
- World Acceptance, down 53.5 percent
- America's Car-Mart, down 50.4 percent
- Bancorp, down 42.1 percent
- Liberty Tax, down 38.5 percent
- BlueStem, down 36 percent