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Forget Capital One, Buy These Consumer Loan Stocks for Growth

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Capital One (COF - Free Report) has been witnessing downward earnings estimate revisions, of late. The Zacks Consensus Estimate of $11.28 for 2020 has moved 1.1% lower over the past 60 days, and suggests a marginal fall year over year. This indicates that analysts are bearish on the stock.

So, what could be the reasons for this pessimistic stance? The first and foremost reason seems to be steadily rising operating expenses. Expenses have been witnessing a CAGR of 5.2% for the last five years (2014-2018). The trend continued during the first three quarters of 2019. The increase was mainly due to higher marketing costs, which are likely to remain elevated given the rising loan growth opportunities.

Further, as Capital One continues to invest in technology and infrastructure, costs related to the same are likely to be on a higher side. Also, management expects to incur incremental costs related to the cyber incident response at the lower end of $100-$150 million range in 2019, with some of these charges to be incurred this year.

Second, Walmart Partnership is likely to have an adverse impact on Capital One’s revenue margins this year. Specifically, management believes that the acquired portfolio will lower the Domestic Card revenue margin by about 50 basis points (bps) in the first three quarters of 2020, and roughly 35 bps in the fourth quarter as the revenue share on the acquired portfolio steps up in October 2020.

Third, Capital One’s asset quality has been deteriorating. Provision for credit losses and net charge-off (NCO) rates have been steadily rising. Hence, the company’s overall credit quality is likely to remain under pressure. Further, the existing Walmart portfolio is likely to increase Domestic Card delinquency rate by about 15 bps at 2020-end. Also, annual auto NCOs are expected to increase gradually in the near term.

Though this Zacks Rank #3 (Hold) stock performed remarkably well in 2019 and surged 36.1%, outperforming both the industry and S&P 500 rally of 34.1% and 27.6%, respectively, the above mentioned concerns are likely to have hurt investor sentiments to some extent.

Price Performance in 2019


Also, Capital One has an unimpressive Growth Score of C. Our research shows that stocks with a Growth Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential. Therefore, the stock does not look promising at present.

Choosing Favorable Consumer Loan Stocks

While Capital One doesn’t appear to be an attractive pick right now, there are a few consumer loan stocks that are good investment options. Before we check those stocks, let’s see how the industry is performing.

Upbeat consumer sentiments, improving domestic economy and higher disposable income are likely to keep driving the demand for products and services provided by the consumer loan companies. Despite the Federal Reserve’s accommodative monetary policy stance, net interest income is likely to continue improving as loan demand is expected to further rise on the back of lower rates. Also, easing credit lending standards are helping consumer loan providers meet the increased demand for loans.

Moreover, the Zacks Consumer Loans industry currently carries a Zacks Industry Rank #54, which places it at the top 21% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Hence, it is a wise idea to add a few consumer loan stocks to your portfolio now.

With the help of the Zacks Stock Screener, we have zeroed in on four consumer loan providers with a Zacks Rank #1 or 2 and Growth Score of A. Also, these companies have earnings growth expectation of 5% or more for 2020.

CURO Group Holdings Corp. (CURO - Free Report) , based in Wichita, KS, has a Zacks Rank of 2. The company’s earnings for 2019 and 2020 are expected to rise 50.5% and 6.1%, respectively. Also, sales are likely to improve 7.5% this year.

Headquartered in Enova International, Inc.’s (ENVA - Free Report) earnings are projected to increase 53.9% and 8.3% for 2019 and 2020, respectively. Also, the company is expected to witness sales growth of 8.8% for 2020. The stock, currently, sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Encore Capital Group Inc. (ECPG - Free Report) has a Zacks Rank of 2. This San Diego, CA-based company’s sales are expected to rise 3.7% for 2020. Its earnings are projected to increase 18.1% and 8.1% for 2019 and 2020, respectively.

Regional Management Corp. (RM - Free Report) , headquartered in Greer, SC, has a Zacks Rank #2. The company’s earnings for 2019 and 2020 are expected to rise 12.6% and 15.8%, respectively. Also, sales are likely to improve 12.3% this year.

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