Low Interest Rates and High Insider Interest
In an economic downturn, more individuals find themselves in the unenviable position of having to choose between feeding their family or sending in that annoying monthly loan payment. Many will understandably choose the former.
This is obviously bad news for institutions in the money-lending business, and the stocks of lending businesses have taken it on the chin in the past few months as the threat of recession has become a reality.
But insiders at many such firms are indicating that the selloff is overdone. Defaults may be up at most financial institutions, but have not reached proportions to justify the market's panic. And even if some customers aren't cooperating nicely, the Federal Reserve certainly is.
As short-term rates decline, so, too, do the borrowing costs of these lending firms. But they are shrewd enough not to pass on all the savings to customers, and this beefs up their all-important net interest margin -- which is the difference between the rates they borrow at and the ones they lend at.So the bet insiders at many lending firms appear to be making is that while increased defaults have been more than priced into their stocks, the healthier net interest margins haven't. A few firms in which that's the case are presented below.
Household InternationalA stock market old-timer, Household (HI) had a spectacular run in the past decade, rising from a split-adjusted $7 to nearly $70 earlier this year. Along the way, Household's stock spurted and weakened numerous times, and insiders proved adept at making money from the gyrations.
MetrisMetris' (MXT) shares understandably have been punished as the fact that we are in a recession has sunk in for most investors. After all, the company lends money to middle-market customers primarily via unsecured credit cards. The lender will benefit from lower interest rates to keep its net interest margin healthy. But Metris is much more susceptible to defaults because its credit-card loans largely are secured with nothing more than a promise from the borrower. While laws passed earlier this year make it more difficult for individuals to file for bankruptcy, higher defaults definitely have hit Metris. In its third quarter, Metris' delinquency rate rose sequentially from 8.3% to 8.9%. And net charge-offs, which were 9.8% last year at this time, rose to 10.7%. But hold on. Metris also announced that its third-quarter earnings met expectations, increasing 46% to 70 cents a share. The company further expects to earn at least another 67 cents a share in the fourth quarter, bringing its full-year EPS tally to about $2.57. Commenting on default concerns, Metris' chairman Ronald Zebeck also made a point recently of reminding investors that his company is well-capitalized, with "industry-leading reserve coverage of 8% of its managed-loan portfolio." So if we are indeed near the trough of this recession, the more-than-halving of Metris'
Popular and Lending TreePopular (BPOP) and Lending Tree (TREE) are two other stocks in the same vein to consider. Two directors at Popular purchased $1.9 million of their shares in September and October at an average price of $28.95. Besides low interest rates helping the banks' net interest margins and generating more home equity loan business, there is also a secular increase in Popular's main target customer: Hispanics. The 2000 U.S. census indicated that Hispanics will become, and perhaps already are, the largest minority within the U.S. The affluence of this group is growing as well. Meanwhile, at Lending Tree, five executives have purchased an aggregate 71,700 shares since September at prices ranging from $3.75 to $4.13. For three of these insiders, their purchases represent an averaging up of purchases they made in early 2001 when Lending Tree traded for as little as $1.78.
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