The Stock for a Jobless Recovery
07/08/2011 10:30 am EST
Big financials are an investing wasteland at this point, but there are pockets of great value in financial services for cash-strapped consumers, notes Ian Wyatt of Small Cap Investor.
High unemployment continues to plague the US economy.
According to the Department of Labor, the official unemployment rate recently increased to 9.2%. It's tough to imagine the illusion of a recovery extending much longer when millions of people are unemployed.
And it doesn't take a market expert to absorb all of the aforementioned economic data and come to the conclusion that the US economy is in trouble.
So the question as a small-cap investor—or any investor for that matter—is, how can we profit from high-unemployment and a struggling economy?
It stands to reason that pawn shops would do well during economic hard times.
I have found a small, burgeoning company that performed well during the last recession, and continues to perform well as high unemployment lingers.
Texas-based First Cash Financial Services (FCFS) has a stronghold on the pawn shop and cash-advance businesses.
With a market cap of $1.2 billion and 627 stores scattered throughout the US and Mexico, First Cash Financial Services offer the traditional pawn shop services plus cash advances.
Typically, an individual goes to a pawn shop when he needs quick cash. As you can imagine, during tough economic times, pawn shops benefit from people in need of cash to pay bills and feed their families.
And even though pawn shops are known as being the middleman between sellers and buyers, this is not where most of their money is made. They make a large portion of their money through the lucrative business of payday lending.
Payday lenders make small, short-term loans against the borrower's paycheck. This allows the borrower to have cash quicker than going to a traditional bank, depositing the funds, and waiting for the cash to become available.
And, of course, the pawn shop charges a hefty fee for the benefit of the cash advance. First Cash charges up to 240% for such services.
Fundamentally, the company is impressive…
First of all, the company has actually upped its earnings per share in each year of the past decade, a feat not accomplished by many publicly traded companies.
Moreover, First Cash recently reported strong profit margins, at 13.1%, and strong recent growth. It recently upped its earnings per share 51.5% and sales 27.7% in the last quarter.
I also like the fact that the company has a very small debt-to equity-ratio of 0.4%. One of the only blemishes on the stock is that, at the moment, it is not as cheap as I would typically prefer. It currently sells for a PEG of 0.91, which is not overly expensive for a fast growing, fundamentally sound stock.
There is no arguing there is value in First Cash Financial. The question is whether the demand for their services will continue if the economy turns around.
Again, one way to gauge the potential for the stock is to watch the unemployment rate. With 9.1% unemployment in May, a large number of people remain out of work, and will likely seek out the assistance of the pawn shops during tough times.