The tug of war going on in the markets now between reality and full on Modern Monetary Theory makes the stock market all but uninvestable until it is clear which side prevails. At the moment the latter seems to have the upper hand, but it is early days and I suspect that reality is not done yet. On the short side, many zombie companies which have been propped up since the GFC with artificially low interest rates are now sensing a new lease of life as they rush to the seemingly limitless Covid trough, as moral hazard abounds. There are always exceptions however...
And even the most tone-deaf politicians must be aware of the rising tide of public indignation at state bailouts and I expect a few industries will be made an example of to assuage the anger. A good candidate here looks to be the deeply unloved predatory sub prime auto loan sector – and they do not come more predatory than Credit Acceptance Corporation (NASDAQ - CACC).
This company is unsurprisingly facing the perfect storm. Prior to Covid it had already seen its default rates rise from 22% to 35% over a ten-year period and it was already facing increasing scrutiny from regulators. Now it’s delayed reporting its Q1 results due around now until “no later than June 25th” and stated the following risk factor should be added to the many in its 2019 annual report: The current outbreak of COVID-19 has adversely impacted our business, and the continuance of this pandemic, and any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely affect our business, financial condition, liquidity and results of operations
Even after its share price fall the company is capitalised at $4.7 billion, which is twice its stated book value, which is double the industry average and has debt of $5.2 billion. One can only guess at the post Covid loan default rate, but I wouldn’t be surprised if it was 70-80%. That would almost certainly result in bankruptcy. At the very least I expect it to trade at book value when the belated Q1 numbers are released and for this reason I believe it is one of few compelling shorts in this environment. I am short at around $270.
This first appeared on the N50 website which Tom Winnifrith runs with Steve Moore & Lucian Miers. To access the website ahead of the next share tip from Tom & Steve and a new shorting piece this week click HERE
Filed under: Credit Acceptance Corporation, Bearcast, Hotel Chocolat, Bidstack, ShareProphets readers tips
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