Following a traumatic event such as the coronavirus pandemic, it’s normal to consider circumstances only as they relate to the crisis at hand. However, if we think back to a time before quarantines and mitigation protocols became a thing, the mainstream media was significantly concerned about a global recession. And that brings to mind an overlooked asset class: alternative financing stocks to buy.
Heading into 2020, you’ll recall that one of the biggest headwinds that sent jitters down Wall Street’s spine was the bitter U.S.-China trade war. At the time, former President Trump was putting the heat on the Chinese government for intellectual property theft, boding poorly for stable economic relations across the globe. Plus analysts were worried about excessive central bank stimulus, which in a roundabout manner impacted alternative financing stocks.
According to Jefferies analyst John Hecht back in September 2019, worsening household finances would be a key factor to watch if the economy enters a recession, imposing hardship on families seeking to manage their expenses. Therefore, alternative financing stocks or securities tied to rent-to-own companies or pawnshops could benefit. Of course, financial engineering by central banks is designed to stop this kind of downward spiral from happening.
The irony, of course, is that the Federal Reserve is now focused on tightening the money supply due to soaring consumer prices. However, that might not be the right move since the economy isn’t showing comprehensive signs of a recovery. For instance, one-third of Americans have missed payments for buy now, pay later type of services. If circumstances were so positive, alternative financing stocks presumably wouldn’t generate under-the-radar interest.
Even if broader conditions were on the up and up, approximately 5.4% of U.S. households or 7.1 million were unbanked in 2019. This figure has surely gone up due to the widening wealth gap that the Covid-19 pandemic accelerated. Therefore, these alternative financing stocks may cynically become relevant again.
Here are 7 alternative financing stocks to buy for the new normal:
- EZCorp (NASDAQ:EZPW)
- FirstCash Holdings (NASDAQ:FCFS)
- Curo Group (NYSE:CURO)
- Affirm Holdings (NASDAQ:AFRM)
- Aaron’s Company (NYSE:AAN)
- Rent-A-Center (NASDAQ:RCII)
- World Acceptance Corp. (NASDAQ:WRLD)
Although the hedging concept of alternative financing stocks seemed a solid thesis just prior to the Covid-19 pandemic, the health crisis scattered everything into a chaotic mess. Now, instead of a trade war, we may see a real war. Furthermore, tensions with China remain unresolved, thus necessitating extreme caution for this and any other investment sector.
Alternative Financing Stocks to Buy: EZCorp (EZPW)
Phonetically, easy might be in EZCorp’s name but it’s certainly not a comfortable ride for investors. A pawn shop operator based in Austin, Texas, EZCorp facilities provide non-traditional financial services across the U.S. and Latin America. However, shares are down 20% for the year, raising eyebrows. Still, speculators may want to give it another look.
While pawnshops have a somewhat tawdry reputation due to Hollywood and pop cultural portrayal, the reality is that that, per the National Pawnbrokers Association, even today, “many people depend on independent pawnbrokers to help them meet daily financial needs not offered by other financial institutions.” Moreover, the association states the following:
“Pawn customers represent the working families of America who periodically experience an unexpected need for short-term funds. Pawn loans keep the electricity on, the rent paid, and cars running with full tanks of gas by providing a safety-net to over 30 million unbanked or underbanked Americans. Independent pawnbrokers also provide services to America’s small businesses.”
Logically, the Covid-19 pandemic imposed a severe and unexpected impact on already hurting American families. While it might seem cynical, EZCorp does provide a necessary service, making it one of those alternative financing stocks to consider.
FirstCash Holdings (FCFS)
One of the most popular alternative financing stocks available, FirstCash is the “leading international operator of pawn stores with more than 2,800 retail pawn and consumer lending locations in 25 U.S. states and the District of Columbia,” per its website.
Like its rival EZCorp, FirstCash also has a presence in Latin America, “which includes all the states in Mexico and the countries of Guatemala, El Salvador and Colombia.” The company “focuses on serving cash and credit constrained consumers primarily through its retail pawn locations.” As well, it facilitates “small consumer pawn loans secured by pledged personal property.”
Although shares of FCFS have seen significant red ink, the benefit to FirstCash is that its year-to-date loss of nearly 10% is roughly half that of EZCorp. Admittedly though, the wild nature of this security makes FCFS a tough buy right now. However, as circumstances cool down, it could be interesting as a long-term speculative idea.
Basically, the government is no longer backstopping the American people. Therefore, those households that are the most vulnerable must get on their feet again, which should bolster demand for pawn shops and similar alternative financing stocks.
Curo Group (CURO)
Taking its name from a Latin word that literally means “to provide money,” Curo Group, “uses sophisticated and proprietary acquisition, underwriting and CRM [customer relationship management] technologies to manage a diverse range of online, mobile and branch-based consumer financial and loan services.”
As mentioned earlier, the Federal Deposit Insurance Corporation estimates that 7.1 million households in this country are unbanked. As the Detroit Free Press added, “Millions of consumers — including people of color — aren’t able to easily cash a check or visit an ATM because they’re not customers of regular banks.”
Further, it’s very possible that the circumstances associated with the pandemic could see more people fall out of the network of traditional banking, particularly workers “who experience significant variations in pay from week to week,” who are “more likely to not have a basic checking or savings account.”
This is where Curo Group steps in. By leveraging technology, the company is able to serve a broad range of non-prime customers in the U.S. and Canada. Further, with the collective savings associated with stimulus payments and unemployment checks winding down, people will need other means of securing capital, boding well over the long term for alternative financing stocks.
Affirm Holdings (AFRM)
While the narrative for alternative financing stocks ahead of a possibly rough economic cycle makes intuitive sense, as you can see from their immediate performance this year, the statistics aren’t exactly pleasant. Clearly, this segment is a wait now, buy later type of deal. That’s rather ironic for Affirm Holdings, which specializes in the buy now, pay later business model.
Well, one look at AFRM stock and you’ll see why you may want to let the knives fall first before sticking your hand out for a discount. Since the January opener, AFRM has dropped more than 46%. That’s not just shocking for alternative financing stocks; simply, it’s miserable no matter what market segment you’re focusing on.
Personally, I’m torn with Affirm. Though the backdrop for alternative financing stocks is intriguing, Affirm hasn’t delivered on the financials. Sure, the company’s growing the top line sequentially; however, the losses on the bottom line continue to expand quarter after quarter. Add the Fed’s hawkish monetary policy signaling and you have a shaky investment.
Nevertheless, if the economy falls into recession, people will find ways to stretch their dollars — high rates or no. So if you have speculation funds lying around, you may want to nibble at AFRM.
Aaron’s Company (AAN)
A rent-to-own business, Aaron’s Company allows customers to buy a range of products from furniture to household appliances to electronics via a pay-as-you-go model. This enables everyday folks to stock up on all the essentials, particularly important given the unprecedented housing boom.
As you know, the real estate market is incredibly cutthroat these days, with multiple bids racking up on the screen the moment a new property lists. To convince sellers who now enjoy an overflow of offers, many are choosing to forego contingencies. However, this extreme bull market has caused many new homeowners to stretch themselves, leading to certain financial regrets.
Still, with the ink dried on the contract, there’s not much that can be done. Further, the financial stretching that occurred leaves few liquid funds lying around for furniture and similar items. Therefore, Aaron’s Company could fill an important role in the housing boom, especially if it continues unabated.
Admittedly, the storyline here is on the riskier side. And similar to other alternative financing stocks, AAN is down sharply, shedding nearly 18% YTD. However, once the market stabilizes, AAN might be something to consider since so many potential customers are stuck with their pricey home purchases.
If you’re focused on alternative financing stocks in the rent-to-own segment, Rent-A-Center may be a viable idea. Like the others on this list, RCII is admittedly a falling knife type of investment, with shares down nearly 15% YTD. Further, over the trailing year, the stock has gone nowhere, engaging in choppy trading but settling for a 3% loss.
However, some analysts were looking to Rent-A-Center as a recession hedge prior to the Covid-19 disaster. Part of the reason is that during economic downturns, consumer spending doesn’t go straight to zero. Instead, many households look for ways to stretch their cash flow first before biting the bullet and making wholesale cuts. Therefore, RCII may offer relevance as one of the alternative financing stocks to consider.
Interestingly, Rent-A-Center was one of the biggest winners throughout the entirety of the Trump administration. Shortly after the former president entered office, RCII was trading in single-digit territory. Right before the pandemic, shares were briefly trading above $30. Leading up to the 2020 election, shares frequently traded above $30 (though to be fair this stock really took off after President Biden won).
The point is, the historical nature of RCII seems to confirm the idea that alternative financing stocks can weather economically negative events. Thus, gamblers may want to consider RCII after it’s done bleeding out prior excess bullishness.
World Acceptance Corp. (WRLD)
Billed as a small-loan finance company, World Acceptance Corp. specializes in “offering short-term small installment loans, medium-term larger installment loans, related credit insurance and ancillary products and services to individuals.” Per its website, loan approvals can occur in as little as an hour, perfect for life’s unexpected expenses.
At least that’s the marketing message. As an investor, you’re not necessarily going to see WRLD as a perfect play, with shares plummeting over 20% YTD. Unfortunately, the panic on Wall Street has hit alternative financing stocks especially hard. At the same time, WRLD’s trailing-year return of over 29% provides a glimmer of its potential.
Similar to Rent-A-Center, World Acceptance was largely a beneficiary of the Trump administration. In early February 2017, WRLD was trading below $50. At its peak in 2019, it jumped above $170 before declining to $90 prior to the pandemic. Still, it went onto recover from the doldrums, reaching record heights late last year.
In other words, alternative financing stocks under non-pandemic conditions tend to weather economic uncertainty well. Therefore, once WRLD releases the excess speculation baked into its price tag from this hopefully non-recurring pandemic, the lending service could be appealing for contrarians.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.