With unemployment around 8% for the past 3 years or so, and the Dow hitting north of 13,500, and with the percentage of people bullish on the market now rising again, some may think that another correction may be imminent. So is there a way to benefit even if the stock market or the economy declines? The answer is an obvious yes, and there are many ways for one to do it, but the stock today is one example of a great recession-proof stock.
EZCORP (NASDAQ:EZPW) is a pawn shop operator. Although it is commonly viewed as one of the more "low-class" financial stocks, it may be the one that is outperforming more famous financial stocks like JPMorgan Chase (NYSE:JPM) or Morgan Stanley (NYSE:MS).
A snapshot of the company's information:
Book Value per Share
EPS Growth Past 5 Years
Current Ratio (Assets/Liabilities)
It is easy to see how much a bargain the stock is in terms of price at the moment, with a P/E of just 6.94 and a forward P/E of 5.99. Even so, EZCORP had seen EPS growth of 28.5% over the past 5 years, which is fabulous growth, and is likely to grow some more. It's expected to grow at a whooping 15% over the next five years. Along with the fact that recessions are inevitable and that many view places like EZCORP as places to get instant and easy-to-get money, all these reasons make it a good choice for a long term investment that will serve an investor's portfolio well.
At a newly created 52-week low of $19.29, I'm sure one would like to know why it dropped so much before investing in it. The reason for this horrible drop is actually the drop in gold prices over the past year. As gold prices declined, EZCORP found it had bought gold previously at higher prices than it was currently selling. Missing 3 earnings estimates in a row now, it is not favoured on Wall Street, especially given that its stock crashed more than 40% since its high, as stated above. But even so, it is still financially stable and growing very well in Mexico and Great Britain, where there are many more opportunities for it to grow, especially in South America, where it is still developing. Furthermore, with Fed Chairman Ben Bernanke announcing QE3, gold prices are expected to rise, which would also increase EZCORP's earnings. All these give the company's stock huge potential to grow.
Now that it is decided that the stock is worth a buy, here is how to enter the trade.
EPS 2012 (Est.)
With the company on its way to achieving its 2012 estimate of $2.79 per share, we shall use that number as a starting point for our calculations instead of using the 2011 number. Our aim is to achieve a 15% year over year gain for 5 years on EZCORP.
With an expected 15% growth rate, the calculations will be based on a more conservative 11% growth. The EPS should be $4.92 in 2017 as shown by the chart below.
EPS 2013 (est.)
EPS 2014 (est.)
EPS 2015 (est.)
EPS 2016 (est.)
EPS 2017 (est.)
Assuming that its P/E ratio rises to its 5-year average of 11.29, its price would be at $55.55, 177% above yesterday's closing price. To achieve a 15% gain year over year, $27.62 is the maximum price that it can be bought at. Its price at the moment, more than 25% below $27.62, is obviously a Strong Buy to me.
But, as EZCORP is in a strong downtrend, it is advised that one does not put in all his money reserved to buy the stock into it immediately, or rather spread the money into portions and buy when it dips further. Here is a list of potential buy points to consider:
(Eg, Buy 100 at $19.29, 100 at $18.33 and 100 at $17.36)
With the exception of failing businesses, a company's stock would not go down forever. Although EZCORP's price is in a downtrend and looks as if it may drop further, delve deeper into its background and one will find that it is actually a company with huge potential and one worth buying on more dips.