This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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 International

A 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.

With Household's stock now relatively weak again, insiders are telling us it's buying time once more. Four insiders purchased 15,100 shares in September and October at prices between $50 and $58. Chairman William Aldinger is a good example of the prescience Household insiders have shown in the past. He was a steady purchaser from the end of 1995 to the beginning of 2000, averaging up even as he doubled the value of his early positions. Mr. Aldinger then astutely started to take profits as Household continued to hit all-time highs in late 2000 and early 2001. His latest transaction was a purchase of 10,000 shares Sept. 19, an investment that totaled more than $500,000.

Household International is a holding company whose operating units extend credit primarily to middle-market customers. With the economy in recession, it was not surprising to see Household and its peers fall as concerns about loan defaults rose. Household is in better shape than many consumer loan companies, though, given that a relatively small percentage of its portfolio is comprised of unsecured credit-card loans. As its name suggests, a good portion of its loans are the home equity sort -- and the housing market has so far kept strong.

Household avoided serious economy-related problems in its third quarter. In fact, it announced the largest quarterly profit in its 123-year history. Earnings per share increased 14% year over year, a rate Aldinger said in the company's most recent earnings report that he thinks is sustainable even with the difficult economic environment. Low interest rates are helping to keep Household's net interest margin high and should also help spur more home equity loans.

Household's business also will do better after a recovery, and with its shares now 25% off their highs, the stock arguably has an increased default rate priced into it already. The time to bite on shares in this industry is at the trough of an economic slowdown, when stocks have been punished and defaults have peaked. Insiders seem to think that time is now.

Most analysts rate this stock a buy or strong buy. With EPS growth expected to be in the midteens for the next two years, Household may not be the sexiest stock around, but it should be a solid performer. Indicated yield is 1.7%.

Metris

Metris' (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' market cap over the past four months may prove to have been more punishment than the firm deserved. Analysts' opinions range from hold to strong buy, but Metris now looks like a reasonable value, even on the low-end 2002 EPS estimate of $2.83.

Metris director Lee Anderson and chairman Zebeck certainly think the selloff is overdone. They have invested nearly $1.2 million in Metris since September, at an average price of $19.44. Both have purchased before price spurts in the past.

Popular and Lending Tree

Popular (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.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to jonathan@insiderinsights.com.

TheStreet.com and Moreland are parties to a joint marketing agreement relating to InsiderInsights, a weekly newsletter written and owned by Moreland. Under the agreement, TheStreet.com provides marketing services, including promotion of InsiderInsights on TheStreet.com's Web properties and in his columns that appear on those properties. In exchange for these services, Moreland shares with TheStreet.com a portion of the revenue generated by subscriptions to InsiderInsights resulting from those marketing efforts.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs