I am a value investor. I favor value stocks and stay away from big momentum plays, the growth stocks that are delivering crazy returns, and stocks that have been overvalued for longer than I care to remember. While that often results in missing out on incredible runs in some stocks, such as Netflix, Inc. (NASDAQ: NFLX) and Tesla Inc. (NASDAQ: TSLA), my risk appetite is such that I don’t want to get caught holding the bag.
I prefer value stocks, especially small-cap value stocks, because over the very long term they tend to do better than some of these momentum plays. These are the stocks that made Peter Lynch famous. He would find a great business, note that it was distasteful in some way, buy it, hold it, and watch it turn into a 10-bagger.
So I’ve got three stocks today that I believe are significantly undervalued and that I expect will return multiples of my investment over the next few years. It will take patience, and the stocks are hated by a lot of other people because of the businesses that they are in, but they’ve also traditionally served me very well.
Value Stock 1: Curo Group Holdings Corp
As far as value stocks go, Curo Group Holdings Corp (NASDAQ:CURO) is a relatively recent IPO of a company that’s been around for almost 20 years. Its storefronts are better known as Speedy Cash. The company offers unsecured installment loans, open-ended loans, and single-payer loans, often referred to as payday loans. This is an industry that has gotten a lot of bad press over the past 20 years, most of it undeserved.
The simple truth is that, in this country, there are a lot of people needing short-term credit. They can’t get it from a bank. The old household personal lenders were absorbed by the banks many years ago. Where are they going to go for a short-term loan of $300 or $400? Payday lending is not a insanely profitable business, but it generates good cash flow.
The company went public late last year at $14 a share, and it presently trades at $24 per share.
Value Stock 2: Ezcorp Inc
A very similar business in the value stock realm is Ezcorp Inc (NASDAQ:EZPW). For many years, the company offered both payday loans and pawn loans. A number of years ago management turned over and the company made ill-advised ventures into Internet lending and Mexican payroll advances. It was a terrible decision for the company, and the stock fell to $3 per share. Management has since dumped all payday lending from its model.
Pawn shops have a very stable, very long term history in this country, and the company has a base of more than 500 stores in the country. It is also expanding into Latin America and has more than 400 stores in that region. Latin America is where the growth is at for this company and its competitors going forward. Latin countries have really taken to pawn lending, particularly since Ezcorp and its competitors have converted rundown old stores into well-lit modern facilities.
Ezcorp trades at $13 per share. I already have a four-bagger in the stock and expect to go higher.
Value Stock 3: Encore Capital Group
If you’ve detected a theme by now in these value stocks, good for you. I’m enthralled with financial services companies that people can’t abide. That’s why I’m also selecting Encore Capital Group, Inc. (NASDAQ:ECPG). There are few businesses that people find more distasteful than debt collecting. I don’t understand this attitude at all. If you take out a loan, you need to pay back. If you don’t, someone needs to try to collect it from you.
A good debt collector is able to buy debt cheaply, at a penny or two on the dollar, finance at purchase with a cheap credit line, and then collect multiples of what it paid for the debt. Imagine a consumer with $5,000 in debt. A credit card company charges the whole thing off and sells it to a collector like Encore for $50. If Encore can squeeze a couple hundred dollars out of the consumer, that’s an incredible return on investment.
Debt collectors have been running scared recently because the Consumer Finance Protection Bureau scared debt sellers by threatening them with liability if there was anything funky whatsoever about a debt sale. Thankfully, the bureau is now being run by someone who doesn’t stand in the way of business, and I expect to see significantly increase profitability at Encore going forward.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns CURO, EZPW, and ECPG. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Meyers can be reached at [email protected].