US consumer credit is rising—will these credit services stocks do the same?

By Mary-Lynn Cesar for Kapitall.

US consumer credit beat expectations in July and grew by its biggest amount in almost 13 years as consumers sought out more auto and student loans. The Federal Reserve said total consumer credit rose $26.01 billion to $3.24 trillion, its biggest gain since November 2001. Economists surveyed by Reuters had predicted a $17.35 billion increase.

Nonrevolving credit—installment loans for the purchase of investment in a business, car, house, or higher education—grew by $20.6 billion to $2.36 trillion. Revolving credit, which includes credit cards and home equity lines of credit, increased by $5.3 billion to $880.5 billion.

Yet, although consumer credit is on the rise in the US, a recent survey reveals that millennials are steering clear of credit cards. Bankrate (RATE), a consumer financial services company, found that 63% of young adults between the ages of 18 and 29 don't have a credit card. That figure falls to 35% amongst adults 30 and older.

"It's not so much (that millennials are) anti-credit card, but it's more the risk of debt," states Eric Lindeen, Director of Marketing at credit solutions provider Zoot Enterprises. And the possibility of incurring more debt is particularly high amongst millennials as they're less likely to pay their balances in full each month and are more likely to flat out miss payments. According to the survey, 40% of people in the 18–29 age bracket pay off their entire balance on a monthly basis while 53% of adults 30 and over do the same. 

The recent consumer credit news inspired our following screen. We began by pulling together a group of US financial stocks belonging to the credit services industry. After that, we screened the group for stocks  trading up to 5% below their 52-week high as of 10:55 AM EST. This means that a stock is nearing its highest price within the last year, and, for some investors, is indicative of strong upward momentum.

Next, we looked for stocks with  positive earnings per share (EPS) growth this year and on a quarter-over-quarter basis. We decided to run this screen to see if higher consumer spending had possibly translated into higher earnings for US consumer credit stocks since they're the ones supplying the credit cards, auto loans, and student loans to the public.

For our final screen, we narrowed down our group to stocks that are  undervalued with a price to free cash flow (P/FCF) ratio under 15. This valuation metric divides market capitalization by free cash flow (operating cash flow minus capital expenditures) to evaluate a company's stock price in relation to the cash it generates. A company with a low P/FCF ratio has a lot of cash on hand, which it can use to pay and grow dividends or invest back into the firm. 

We were left with three stocks on our list. Do you think these US consumer credit stocks will soon pass their 52-week highs? Use this list as a starting point for your own analysis, and let us know what you think in the comments. 

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