AmeriCredit (ACF) is probably the riskiest of the 20 stocks in my Top 20 Model Portfolio, but it is possibly the one with the most upside. Investing in this company now in my opinion is a bit like buying beachfront property during a hurricane. For those not familiar with the company, it is a leading provider of sub-prime auto loans. Can you feel the gales blowing?
Make no mistake - ACF is potentially dead meat, as it historically has relied upon the capital markets to finance its lending (securitization). I believe, though, that they will survive.
I had done some work on the name for a client and actually found a lot to my liking earlier this year. I was encouraged particularly by Leucadia's (LUK) massive purchase - they now own 25% after first purchasing shares in January. Beyond that, I believed that AmeriCredit was in much better shape than other lenders in the primarily used car market, and that it had strong franchise value despite the terrible current environment. Additionally, their strong relationship with credit provider FSA was reassuring.
In April, when they announced the Deutsche Bank, that included a $2 billion forward purchase of AAA securities in exchange for warrants, I decided that the company's prospects had improved dramatically and bought stock that day at 11. I sold out in May just under 15, but I am long again. This time, I expect to see a high closer to 17 as the company moves above book value and as investors begin to assume higher margins in 2010. Short-interest is very high (14 days, 17% of the shares outstanding), though it has declined over the past two months. Below 10, there was some insider buying.
Disclosure: Long ACF
This article has 7 comments:
ACF's earnings and sales growth are in the toilet, and at a time when the consumer loan industry is about as risky as a steerage ticket on the Titanic.
I notice that as of Friday, June 20, ACF has hit its current price for the third time in 7 months... a support level.
If you're right, then this is yet another 'triple bottom' play, and the stock will rebound to the $14.50 or better.
I've found that the third time a stock hits support is usually the last time it does so and that as this industry is trending lower... your odds are longer than a Mississippi sermon.
Good luck!
The risk to ACF is clearly in the loss experience they will endure. They are dead-meat, as I mentioned above, if they can't get the capital to allow them to continue to originate new loans (in a more lucrative market to be an underwriter due to less competition). So far, they seem to be taking the right steps to navigate the crisis. I wish I knew Leucadia better so that I could have a more informed view of the likelihood that they buy the company. They have bought a lot of stock at higher prices, and, from what I understand, have been in the business before.
The risk to ACF is clearly in the loss experience they will endure. They are dead-meat, as I mentioned above, if they can't get the capital to allow them to continue to originate new loans (in a more lucrative market to be an underwriter due to less competition). So far, they seem to be taking the right steps to navigate the crisis. I wish I knew Leucadia better so that I could have a more informed view of the likelihood that they buy the company. They have bought a lot of stock at higher prices, and, from what I understand, have been in the business before.
Total residential real estate in US is $19 trillion now and total mortgages is $10.6 trillion. Take a 25% drop in house prices and you get $14 trillion or so worth or residential real estate and $10 or so trillion in mortgages.. equity becomes some 36% .. unprecedented. Frankly, it just wont' happen. $2 trillion of mortgages will simply have to be written off.
$2 trillion in mortgage loans bound to be worthless.
Got SKF?