Investors’ optimism over rising interest rates, improving economy and the expectation of lesser regulation helped the broader Zacks Finance Sector outperform the broader market in the past 12 months. Nonetheless, the Zacks Consumer Loans Industry, which is a part of the broader Finance sector, hasn’t been performing well for quite some time now.
Weak domestic growth, continued low consumer confidence, low rates and increased regulations were some of the major factors that were responsible for this weak performance for the consumer loan industry.
This is evident from the industry’s 10.6% gain in the past year versus the 21.3% growth of the Finance sector and 15.9% rally of the S&P 500.
What’s Ailing the Industry?
Per the Federal Reserve’s data, consumer loans have recorded a steady growth over the last three years. Though loan growth somewhat slowed down this year, improving economy and low unemployment rates will likely continue to aid modest rise in the demand for consumer loans.
Also, rate hikes seem to be in favor of the industry. Then why such apathy toward consumer loan stocks?
Primarily, stringent financial regulations affected the industry’s growth. Higher capital requirements and other rules under the Dodd Frank Act curbed profitability of consumer loan stocks.
As a result, following the Presidential elections in November 2016, consumer loan industry recorded a jump. This was basically driven by Trump’s promises for potential lesser regulations. However, in the present environment, investors are skeptical about the President living up to his promises.
Other structural reform as promised by Trump, particularly lowering tax rates is expected to take significant time to get finalized and implemented. So, the consumer loan industry may not witness a considerable increase in loan demand anytime soon.
Industry Rank Indicates Dismal Performance
This 17-company industry carries a Zacks Industry Rank #208, which places it at the bottom 19% of the 250 plus Zacks Industries. Our back-testing shows that the top 50% of the Zacks ranked industries outperforms the bottom 50% by a factor of more than two to one.
Stocks Worth a Look
Though the industry seems to be out of favor, there are a couple of consumer loan stocks that are worth betting on.
Both these stocks have been witnessing upward estimate revisions and carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Southfield, MI-based Credit Acceptance Corporation (CACC - Free Report) has been witnessing positive estimate revisions. Over the last 60 days, the Zacks Consensus Estimate for earnings has increased 6.5% and 9.1% for 2017 and 2018, respectively.
EZCORP, Inc. (EZPW - Free Report) , headquartered in Austin, TX, has been witnessing positive estimate revisions. The Zacks Consensus Estimate for earnings has increased 6.5% and 9.1% for fiscal 2017 and fiscal 2018, respectively, over the last 60 days.
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