I skipped over this ad when it first started circulating a week or two ago, but I’ve had a lot of folks writing in to ask about it lately so I thought I’d give it a quick look today — he’s calling this new pick his “Sleeper” for 2010, so a week or so shouldn’t make any difference, right?
Here’s how he teases it as he tries to convince us to subscribe to his Emerging Growth newsletter (about $1,000):
“My 2010 Sleeper Stock
“Buy this one now while Wall Street is looking the other way and I guarantee I’ll become your new best friend for life.”
That is awesome, because I was just thinking it would be really handy if I had someone to pick me up at the airport on Sunday night — that’s what best friends for life are for, right? I know, he lives out West somewhere, but still — best friends sacrifice.
My best friend Louis tells us that he’s been picking a “sleeper” stock every year around this time, and he claims to have chosen some great stocks for this honor, including Apple back in 2004. He claims that he picked InterOil as his 2008 sleeper, though I didn’t see it touted as such (InterOil is getting lots of attention lately and is up dramatically), and after looking back in my email archives it looks like his sleeper of 2007 must have been DirecTV, which kept sleeping for a while but is now up from those levels.
So what is this company? Here’s the first swath of clues:
“Like our past sleeper stocks before it, this company is also a fast moving small company that few people know about that is exploiting its strengths, dominating its industry, and increasing shareholder value year after year.
“Yet I think the potential for this sleeper is much, much bigger. Why?
“Because this proven consumer lender stands squarely on the ground floor of three new profit trends that are sweeping across the country:
“1. The resurgence of the U.S. car market,
“2. The improving economy, and—perhaps most importantly—
“3. The government’s directive to get the banks lending and car buyers buying again.”
Hmmm … interesting, but not quite specific enough. What else do we learn?
The company has been “… richly rewarding investors with 183% profits in 2009—one of the worst years for car sales on record! ”
And the stock has apparently given 30%+ gains to investors over the last 30 days, which puts it pretty well in Navellier’s momentum-hungry sweet spot.
One last bit with a few clues hidden inside? Here you go:
“Unlike the automakers that only profit when their own cars are sold, finance companies profit from both used and new sales regardless of the manufacturer.
“As you’ll read in the issue of Emerging Growth online now, the biggest winner of all will be our top-rated finance company with their 3000-dealer network across the country.
“1. The company has the largest dealer network in the country, and is profiting from the resurgence of sales of both new and used cars
“2. The company not only can approve a car loan in 30 seconds but can also guarantee credit approval to those with credit problems and still profit.
“How can this be? The company custom tailors each loan to the vehicle and the credit worthiness of the car buyer. The result reduces defaults while increasing the company’s profits.”
So, who are we dealing with? Well, with those clues the best match today is …
Credit Acceptance Corp (CACC)
CACC does work with a network of more than 3,000 auto dealers, and they do have a “patented” 30-second approval system and a focus on serving all buyers, even those with low credit scores or bad credit history. The stock is up significantly, actually now it’s up about 50% since early December and is at all-time highs, up nearly 200% over the past year. And it’s fairly small, with a market cap of a bit over $1.5 billion.
They’ve actually been around for a long time, the company was started by Don Foss, a big owner of auto dealers, in the early 1970s, and they’ve been through some booms and busts before — this was obviously a feared name during the abrupt slowdown of car sales and the credit crunch, and I think most folks would probably give a little shudder still if you offered them shares in a auto loan company just because of the period we’ve been through.
CACC runs with nice big profit margins, and they actually have surprisingly little debt on their books — I don’t know how they structure their loans, if they sell them or hold everything, but that would be worth looking into. It appears that they try to partner with dealers to essentially share the financing risk — the dealer doesn’t get the full purchase price up front, they can either take a substantial one-time payment and get the rest slowly, or they can take a smaller up-front payment and “participate” in the profits from the loan, assuming that the loan performs, so that sounds like a fairly smart risk-sharing business plan that also cuts capital needs. Louis does have this ranked as one of this top finance companies in his Portfolio Grader system, you can see the free scorecard here (don’t worry, this is part of his free package for everyone, you don’t have to be his best friend).
CACC has very heavy insider and “beneficial” ownership, Don Foss still owns about 30% of the company, and there are a couple other non-insider owners who together own about the same portion, but otherwise mutual fund and institutional ownership is very low — there’s a small float, and close to 10% of that float was sold short as of a few weeks ago, so the stock certainly has the potential to be a bit more volatile than its size might suggest. Surprisingly enough, according to the Yahoo Finance data there’s only one analyst covering these shares, with estimates of $4.57 for 2009 earnings and $4.94 for 2010, so that’s close to 10% earnings growth and a forward PE ratio of just a bit over 10 (the actual numbers give a trailing PE of about 13). Navellier apparently thinks you should buy before “blowout” earnings are released for the fourth quarter — I’m not sure how that “blowout” will be calculated, since there’s so little analyst coverage and not much in the way of estimates to beat, but if they follow last year’s schedule they’ll be releasing earnings next week.
So what do you think? I have to admit that a auto finance company with lots of bad-credit borrowers still spooks me, but the numbers look pretty encouraging — if you’ve got an opinion on CACC or their competitors, just let us know with a comment below.
And of course, we’re always delighted to hear about newsletters that you love or loathe — this teaser ad was for Navellier’s Emerging Growth newsletter, which is the highest-rated Navellier letter over at Stock Gumshoe Reviews but has a fairly average rating overall. If you’ve subscribed to Emerging Growth or just want to see the reviews that other subscribers have contributed, please click here.
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