Let’s face it – the banking system is never going to be the same again. There are still toxic mortgages to be wrung out of the system, and we don’t even know how many there are. Banks have tightened credit to the point where friends of mine in upper income brackets with plenty of liquidity have to put up huge down payments to buy a house. Banks are being slammed with tons of new regulations. Foreclosures settlements and litigation are ongoing, and investment banks are under greater scrutiny.
Why would you want to invest in any of these stocks? Even if none of the above were transpiring, the growth rates of these businesses stink. Plus, it’s impossible to read the balance sheets and P&Ls of banks. There are just too many moving parts.
Bank of America
Analysts expect Bank of America (NYSE:BAC) earnings of $0.62 this year and $1.06 next year, but what are the quality of those earnings? And if the CFPB clamps down on overdraft fees, which make up a huge part of bank earnings, then what? The dividend hasn’t even returned to where it was. Blech.
It’s possibly in the best shape as banks go, but Wells Fargo (NYSE:WFC) just purchased $500 million in loans from a German financial-services company. With the crisis in Europe right now, I wouldn’t touch this stock with a 10-foot pole.
Goldman Sachs (NYSE:GS) used to be a no-brainer investment for me. It was always on the right side of a trade. But it’s seeing unrelenting criticism in the press, which has harmed the stock, and the scathing Greg Smith editorial in The New York Times sullied the firm’s reputation even further. Earnings quality has diminished.
What used to be the go-to sector for safety and dividends now represents the height of risk. So if you want to be in financials, where do you go? Look for growth and the best players: credit-card issuers and pawnshops.
Visa (NYSE:V) is in great shape, reporting great earnings (23% growth). And virtually all metrics look robust. Plus, it has $9 billion in cash. I’ll take a company that’s part of an oligarchy growing at 20% annually and is trading at 20x earnings in a heartbeat! And by the way, Mastercard (NYSE:MA) is doing equally well — same growth, same robust metrics, same multiple. Buy!
Then there are the financial services you don’t hear about that are also growing at 20%: pawnshops. The poor economy has sent many people to their closets for items to pawn, and consequently these companies are doing extremely well.
First Cash Financial Services
First Cash Financial Services (NASDAQ:FCFS) has made a point of expanding its Mexican pawn business, which is on fire. There’s no regulatory threat whatsoever in pawn, either domestically or internationally. All cash, no debt — and gross margins on the sale of pawned merchandise hover around 40%!
There’s even better news: The stock sold off after the earnings report for no reason whatsoever. So here we have a company with 20% growth annually for the next five years. That’s $55 fair value today based on 2012 earnings of $2.77, $66 for 2013 and going all the way out to 2016 you get a a fair-value yield of $110.
Meanwhile, the stock trades at — are you ready? — $40 a share. So you’re looking at a company that’s undervalued by 40% today that’s a triple in five years.
The only situation better than this is EZCorp (NASDAQ:EZPW), which has a growth forecast of 15% annually for the next five years. With 2012 earnings of $2.92 and a 15x multiple, it has a fair value of $44. The stock trades at $26.50.
EZCorp tanked recently because management slightly lowered estimates. The thing that I believe both management and the market are missing is not just EZCorp’s successful move into Mexican pawn but also the purchase of the majority of Crediamigo. This Mexican company makes loans directly to employees of large companies and can deduct the principal and fees directly from their paychecks, virtually eliminating default risk. This will be a big contributor going forward. Crediamigo also owns chunks of an Australian payday-loan company and a U.K. pawnshop operator.
As of this writing, Lawrence Meyers is long FCFS and EZPW.