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3 Lenders Set to Rally Amid Today's Fed Decision

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The Federal Reserve’s final monetary policy decision of 2021 is slated for this afternoon as the Fed concludes its two-day policy meeting. The public will hear from central bank Chairman Jerome Powell at a news conference scheduled for 2:30 p.m. ET.

Investors are anticipating that the Fed will accelerate the tapering of its bond-buying program and lay the groundwork for multiple interest rate increases next year. Powell has finally begun to acknowledge in recent weeks that current inflationary pressures may not be as ‘transitory’ as he had originally described, stating that “inflation risks have escalated” as he moves to unwind the Fed’s bond purchases.

Even in the face of today’s November retail sales miss, it is likely that Powell will stick to the script as the economy has shown signs of resilience this year. The Commerce Department stated that consumers spent a record $638 million at stores and restaurants in October which was 21% above pre-pandemic levels. As many shoppers began getting their holiday gifts earlier this year, a slight slowdown in sales growth for November makes sense.

While the most optimistic economists are projecting Q4 GDP of up to 8%, even a 6-7% growth rate allows Powell the room to begin the process of normalizing the business cycle and raising interest rates. In my view, that process should have started at this point and now Powell has to play catch-up. Raising interest rates from these ultra-low levels should not be viewed as a negative. Rather, it is a sign that the economy is back on solid footing and can withstand higher borrowing costs.

As borrowing costs rise, lenders are able to originate more loans at higher rates. An increase in lending and related services creates more income for these companies. Historically during times of above-average inflation along with periods of rising interest rates, financials have fared relatively well.

The Zacks Financial – Consumer Loans industry group contains the three lenders we will discuss below and is ranked in the top 39% of all 253 industry groups. This industry is located within the Finance sector, which is ranked in the top 13% of all Zacks sectors. Quantitative research suggests that about half of a stock’s return is due to its industry grouping. Targeting stocks in top Zacks Ranked Industries can dramatically improve your stock-picking success.

Mr. Cooper Group Inc. (COOP - Free Report)

Mr. Cooper Group provides origination, quality servicing, and transaction-based services primarily to single-family residences in the United States. Based in Coppell, TX, COOP offers home loan services with a focus on delivering lending products, services and technologies.

COOP trades at an attractive 4.76 P/E and is outpacing the market this year with a 29% return. The home lender has produced an average positive earnings surprise of 16.14% over the last four quarters. COOP most recently reported EPS for the quarter ending in September of $2.42, a +22.84% surprise over consensus.

Mr. Cooper Group (COOP - Free Report) Price, Consensus and EPS Surprise

Zacks Investment ResearchImage Source: Zacks Investment Research

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. The technique has proven to be quite useful for finding positive earnings surprises. In fact, when combining a Zacks #3 Rank or better along with a positive Earnings ESP, stocks produced a positive surprise 70% of the time according to our 10-year backtest.

Analysts covering Mr. Cooper Group have upped their full-year earnings estimates by 3.77% over the past 60 days. COOP sports a Zacks #2 Buy rank along with a +11.91% Earnings ESP. Our model predicts an earnings beat for COOP for the current quarter.

The current Zacks Consensus Estimate for annual revenues stands at $3.27 billion, a 19.78% increase over 2020. COOP’s next quarterly earnings announcement is scheduled for February 2nd, 2022.

Regional Management Corp. (RM - Free Report)

Regional Management is a diversified specialty consumer finance firm and provides loan products primarily to clients with limited access to consumer credit from banks, credit card companies and other traditional lenders. Headquartered in Greenville, SC, RM has operations in South Carolina, Texas, North Carolina, Tennessee and Alabama.

Trading at a very reasonable 6.61 P/E, Regional Management is a Zacks #1 Strong Buy stock and has exceeded earnings estimates in each of the past five quarters. RM most recently reported EPS of $2.11 back in November, a +34.39% surprise over estimates. The company has posted a trailing four-quarter average surprise of +47.46%, helping the stock climb over 80% for the year.

Regional Management (RM - Free Report) Price, Consensus and EPS Surprise

Zacks Investment ResearchImage Source: Zacks Investment Research

RM revenues are projected to rise by 13.85% compared to last year. Analysts covering RM are in agreement in terms of earnings revisions and have upped their full-year estimates by 9.21% over the past 60 days. The Zacks Consensus Estimate for current year EPS now sits at $8.18. If RM is able to simply meet this expectation, it would translate to an incredible 240.83% growth rate over 2020.

World Acceptance Corp. (WRLD - Free Report)

World Acceptance is a consumer finance company engaged in short-term small loans, medium-term larger loans, credit insurance and related products and services to individuals. Also headquartered in Greenville, SC, World Acceptance operates over 1,200 branches in 16 U.S. states.

WRLD stock has surged nearly 130% this year, easily outpacing not only the market but its industry group as well. WRLD has delivered an average positive earnings surprise of 130.77% over the past four quarters, contributing to the stock’s amazing ascent.

World Acceptance (WRLD - Free Report) Price, Consensus and EPS Surprise

Zacks Investment ResearchImage Source: Zacks Investment Research

The current Zacks Consensus Estimate for full-year revenues stands at $568.47 million, an increase of 8.17% from 2020. Looking out at next year, analysts are expecting sales to rise 4.44% to $593.69 million. WLRD is due for its next earnings report on January 28th.

All eyes will be on the Fed decision this afternoon. Investors will want to keep an eye on these three lenders that are showing significant outperformance.

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