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We had a few unsuccessful forays into pawn shops in latter 2008 and earlier in 2009 as I tried to think of sectors that would benefit from the bad economy. Unfortunately, legislation running through government [Mar 1, 2009: Payday Lenders get Obama'd] against the cash advance side of the business (these businesses are part pawn shop and part cash advance service) caused a huge overhang, and we were unsuccessful making any money in the sector.

However, as I scroll through charts to see what is in the mix of stocks working (a real hodge podge) it is curious to see both EZCORP (NASDAQ:EZPW) and First Cash Financial Services (NASDAQ:FCFS) suddenly blasting off. Cash America (NYSE:CSH) is the largest player in this group, and not doing as well, but this one is less exposed to the pawn side of the business and more focused on cash advance services. Perhaps some of the legislation has been averted... doesn't seem like it; not sure why we are seeing such strong moves.

  • Things have gotten harder this year, not just for cash-starved consumers, but also for a segment of the lending industry that has been yearning to provide them with credit, albeit at a high cost: The payday set.
  • State lawmakers have cracked down on payday lending and the prospect of more oversight in the form of a new consumer protection agency looms on the horizon.
  • At the end of 2008, 15 states had either tight restrictions or outright bans on payday loans, a term that typically refers to immediate cash advances on checks sought by people who don't have traditional bank accounts. So far this year Virginia and South Carolina have joined their ranks, while others, like Missouri, Wisconsin and Colorado, are considering such a move.
  • Other states have tightened restrictions, including Delaware -- the Disneyland of the banking world, known for its lax regulation -- which is forcing payday lenders to fund financial-education classes and advertising for low-cost, "community" lending programs.
  • The other whammy that could come hit the industry is federal regulatory reform. The consumer protection agency proposed by the Obama administration is working its way through Congress, and it's sure to take a hard look at payday lenders if it comes into being. Some proposals have suggested capping interest rates at 36%, just a sliver of a typical payday loan rate.

Valuations are (and were) favorable... i.e. EZPW has been under 10x 2009 earnings for much of the year. But being cheap wasn't helping the stock prior to November... hmm.

If the paper printing economic recovery is going so well, I wonder why the pawn shops are taking off....

Oh well, when in doubt about the veracity of "recovery", I listen to government reports.

The array of stocks doing well right now is mind numbing outside of the typical "growth mutual fund favorites: healthcare, MLPs (yield), defense, utilities (yield), solar stocks, Chinese small caps, and some Boeing (NYSE:BA) related suppliers (end of delays for new jet).

[Jun 12, 2009: Economy So Bad, Even Pawn Shops Start to Suffer]

[Jan 28, 2009: First Cash Financial Strong Earnings on Pawn Shops]

[Jan 23, 2009: EZCORP Up 17% on Earnings]

[Jan 4, 2009: Wall Street Journal - People Pulling Up to Pawnshops today areDriving Cadillacs and BMWs]

[Nov 8, 2008: Bloomberg - Even Pawn Shops in Beverly Hills are Booming]

[Nov 6, 2008: EZCORP - Executing Well, Raising Guidance for '09]

[Jul 10, 2008: Another Payday Loan/Pawn Shop Breaks Out on Higher Guidance - A Trend Seems to be Afoot]


Author's Disclosure: No position

Source: If We're in a Recovery, Why Are Pawn Shops Breaking Out?