With the S&P 500 above 4500, it’s time to take a look at one of its most successful sectors – consumer loans. Executing Zacks Consumer loans an industry with an annual return of 48.1% turns out to be impressive. Over the same period, the S&P 500 rose 21.8%.
The Zacks consumer credit industry is a group of 19 stocks in the broader context of the Zacks. Finance sector. The industry is currently ranked 57th on the Zacks rankings, placing it in the top 23% of the Zacks’ over 250 industries.
Although last year the pandemic caused a complete shutdown of business worldwide and locked people indoors for months as governments everywhere imposed orders to stay at home, the economy is now reopening and gaining encouraging momentum. This is evidenced by the real Gross domestic product(GDP) will increase by 6.3% and 6.6% in the first and second quarters of 2021, respectively. President Joe Biden’s huge pandemic response package and large-scale vaccination programs in the United States have been driving this recovery process for some time.
The short-term outlook looks optimistic as a steadily improving domestic economy and robust economic data will continue to support demand for student, car and card loans. Increased consumer confidence, lower unemployment rates and higher disposable income are likely to influence the growth of consumer lending in the coming period. These factors should somewhat raise the demand for mortgage loans.
TransUnion data for the second quarter of 2021 signals a dramatic resurgence in cars, credit cards, personal loans and mortgages. We expect all financial institutions to see similar trends in the near future as well, assuming COVID-19 cases decline steadily, reopening plans continue, and consumer spending levels remain stable. Even the Fed data reflects a similar upward trend in the second quarter of 2021 for consumer credit cards, student loans, and motor vehicle loans.
The increase in auto loans during the June quarter, despite rising car prices due to a lack of supply, suggests that credit growth is likely to gain support in the coming period, boosted by solid consumer resilience and optimistic sentiment about the economic recovery.
Default on consumer credit cards is at an all-time low, and mortgage lending activities in the country are in full swing. Refinancing exceeds purchasing volumes as consumers benefit from extremely low rates.
Despite the fact that the activity on buying new homes is still high, the rise in home prices may pull some borrowers out of the market. Rising home values have pushed mortgage balances to record levels and we expect lending volumes to remain strong in the near term. Simplifying credit standards is helping consumer loan providers meet strong loan demand.
The Federal Reserve cut interest rates to near zero in March 2020 to bail out the U.S. economy from the coronavirus-induced downturn. However, at the June FOMC meeting, officials indicated in their so-called “dot chart” that there could be two rate hikes by the end of 2023. Therefore, growth in net interest margin as well as net interest income of consumer lending companies is expected to improve in the coming quarters.
Despite a number of lingering concerns, including coronavirus mutations, the aforementioned results are fueling optimism among consumers. As such, these tailwinds are expected to help consumer loan providers see an improvement in delinquency rates.
So now is the right time to add a few consumer loans stocks to your portfolio to help ensure stable returns in the future.
3 consumer loan shares you can bet on
We’ve focused on three consumer loan stocks from the vast universe of stocks. These stocks are currently rated Zacks # 1 (Strong Buy) or 2 (Buy) and are up more than 40% in a year. You can see See the full list of today’s Zacks # 1 Rank stocks here…
Before we move on to discussing the fundamental strengths and prospects of these stocks, let’s take a look at a chart showing the price movement of these stocks from the beginning of the year to the current date.
Image source: Zacks Investment Research
Credit Acceptance Corporation: The company, headquartered in Southfield, Michigan, offers financing programs and ancillary products and services to auto dealers in the United States, allowing them to sell vehicles to consumers regardless of their credit history. In addition, it reinsures vehicles under car service contracts that dealers sell to consumers on vehicles funded by the company.
As the economy resumes and picks up steam, the company’s financial spending is likely to continue to improve, boosted by increased demand for auto loans. In addition, decent growth in the number of dealers and an increase in the number of active dealers are expected to support revenue growth. The company’s stable capital allocation is commendable and will continue to increase its shareholder value.
Credit Acceptance’s earnings estimates changed 24% by 2021 in 60 days, up 108.9% from a year earlier. Likewise, the profit estimate for 2022 has been revised upwards by 2.1% over the same time period. The stock is currently rated # 1 by Zacks.
World Acceptance Corporation: It operates as a consumer small loan business. The company provides private individuals with short-term loans with small installments, medium-term loans with large payments, appropriate loan insurance, and additional products and services. It also offers tax filing services to its loan clients and other individuals.
It is well positioned to exploit favorable supply and demand imbalances in the subprime lending arena. With credit growth and credit dynamics going in the right direction, World Acceptance’s strong cash flows allowed for low-leverage operations. The firm offers simple and attractive products for underserved clients, focusing on the stability, ability and willingness of a particular client to repay loans. No state has a loan concentration higher than 21%, reflecting the geographic diversification of loans. In addition, his detailed underwriting skills combined with a robust collection process have resulted in rapid portfolio growth in recent years.
Profit estimates have been revised 24.9% and 29.5% upward for 2021 and 2022, respectively, over the past two months. In addition, stocks are currently ranked as Zacks 1.
Ally Financial: The company provides a wide range of financial products and services, primarily to car dealers and their clients. The Detroit, Michigan-based company is diversifying into mortgage and asset management services and is making efforts to expand its digital offerings. The acquisition of TradeKing and Health Credit Services (a POS payment provider) is likely to help improve its product line.
High lending volumes, growing retail lending, high deposit balances and the drive for inorganic growth to enrich the food menu will continue to improve Ally Financial’s outlook. In addition, its key catalysts are a strong balance sheet and secure capital allocation.
The Zacks consensus estimate for 2021 is up 26% to $ 8.18 in two months. This represents an increase of 169.97% over the published year earlier. Likewise, the consensus estimate for 2022 earnings has been revised up 12.3% over the same time period. Stocks are currently rank 2 Zacks.