The Fed Just Told You Which Stocks to Buy

by Lawrence Meyers | March 5, 2014 10:55 am

Let’s thank the New York Federal Reserve for its quarterly report on consumer debt. Even a cursory reading gives an investor plenty of guidance regarding what stocks to buy. There’s a wealth of information hidden in the report that most people will miss.


Just look at page 3 — the chart there tells us a lot. After many quarters in which consumer debt balances were declining, we now have two quarters in a row where it is advancing. As the chart indicates, these trends tend to sustain themselves for quite some time, which makes it a good time to find stocks to buy.

Balances are increasing across all types of loans in sectors. Aggregate consumer debt increased in Q4 by $241 billion, the largest quarter-to-quarter increase since Q3 of 2007. The four quarters ending 12/31/13 were the first time in five years that four consecutive quarters showed an increase.

Just a few pages later, we get even more useful information. Page 5 shows that the number of accounts opened in the past 12 months are increasing. Page 7 shows that the credit limits and balances for credit cards are increasing. When looking for stocks to buy, this information is gold.

First, this information tells us that consumers are using their credit cards at increasing rates. Consequently, the no-brainer stocks to buy are credit card stocks. I personally prefer Visa (V[2]) and Mastercard (MA[3]), because they both have the largest market shares.

They are the dual 800-lb. gorillas, and while competitors are good choices, I prefer the cards that are more widely accepted. Mastercard also missed estimates in its recent report, knocking the stock down to reasonable levels and making it even more attractive.

For auto loans, debt balance and number of accounts are also increasing, while auto loan delinquencies are declining. That makes automakers great stocks to buy. Trucks and used cars are selling best right now, so I’d choose the all-American Ford (F[4]) which has regained its footing post-financial crisis, and the king of used car retailers, AutoNation (AN[5]).

Mortgage debt is trending well also, but I’m going to avoid this sector. There are too many crosscurrents in the housing market to give me confidence recommending any stocks to buy in this sector. There’s still a lot of speculation in housing, and mortgages aren’t being originated by long-term homeowners. Rental apartment REITs are still showing growth, as are storage REITs, which shows people moving out of homes. I’d avoid this sector.

The other good news is on pages 10, 11 and 15. Delinquencies are rising, as are collections. If debt balances increase, you would expect delinquencies to rise as well. That bodes well for the big-time players in debt collection, Portfolio Recovery Associates (PRAA[6]) and Encore Capital Group (ECPG[7]). Both just reported robust growth in collections, revenues, and net income. They’re also making large international acquisitions. I love both companies and think they’re are undervalued.

Savvy investors can use reports like this to help discover stocks to buy. Just look to see where the money’s going, and find the companies that are set to capitalize on that influx.

As of this writing, Lawrence Meyers[8] was long PRAA, ECPG. He is president of PDL Broker, Inc.[9], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[10] and blogs about public policy, journalistic integrity, popular culture, and world affairs[11]. Contact him at[12] and follow his tweets @ichabodscranium.

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