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.
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%. 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.