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Top Three Payday Loan Corps Continue to Outperform The Indexes

|Includes:AEA, CSH, EZCORP, Inc. (EZPW)

I logged on to my E*Trade account to check on the portfolio that has been a grief since the beginning of this double dip slump. With the exception of Starbucks which I acquired for only about $16 a share and whose stocks are now trading at over $40, all the other tickers are not living up to my expectations which were probably far from rational...

There is no point selling off as they trade below the paid prices and there is no point waiting for this mess to end as the world governments have been doing all the wrong things from the start and we may be in for a much worse scenario as EU superpowers are consistently failing to pump in liquidity to prop up its troubled members (I mean Italy; Greece certainly needs debt restructuring AND liquidity). So, as an investor and a medium term one, I need to start looking for alternatives to Hewlett Packard and Pfizer. I need recession proof stocks. And tell me what can be more recession proof than payday loans? Especially, when most of the population screwed their credit ratings with no point of return, at least, not soon.

Let's take a look:

In a Nov. to Nov. comparison the top three payday corps: Cash America International (NYSE: CSH), EzCorp Inc (NASDAQ: EZPW) and Advance America Cash Advance Centers (NYSE: AEA) outperformed the three major indexes by a lot. These companies have strong fundamentals (60% operational margins and low levels of debt), and are mostly held by institutional investors. There are certainly factors that might jeopardize the future growth of these payday loan lenders:

  • End of credit crunch
  • Political risks
  • Poor management
Out of these three outcomes, the political risks are of the most concern. As more and more individual states crack down on payday loans by imposing interest rate caps and other regulations to protect consumers from predatory lending practices, some cash advance providers have already wrapped up operations in a few states. The new regulations can also lead to new competition in the niche - from banking institutions. In Ohio, for example, local branches of the big banks now offer short-term loans against pay checks. While just like payday advances, these loans often carry triple digit interest rates, they are clearly competing with payday loans.

It may well be that these cash advance companies have little potential for future growth - some analysts currently recommend to Hold or Avoid these stocks. The fact that they were a good investment a year ago is no indication of their future performance. However, I am going to give them a shot - though I understand it's a bit late.
Stocks: EZPW, CSH, AEA