Consumer Credit – Positive Investor Sentiment in “Controversial” Payday Loan Lenders

As sure as night follows day, mankind needs short term credit. Post credit crunch, the “normal” sources of credit have shifted around. There are fewer banks with a reduced appetite to lend be it via either loans, credit cards or overdraft facilities. They are are distracted by integration issues, grappling with capital adequacy and how to value their existing loan inventory. But politicians are on the war path against the alternative lenders in consumer finance . We will look at the positive investor sentiment surrounding non-bank lenders and a lack of short selling with some notable exceptions. Stocks covered include: Provident Financial Plc – LON:PFG, Dollar Financial Corp - NASDAQ:DLLR, Portfolio Recovery Associates - NASDAQ:PRAA , World Acceptance Corp - NASDAQ: WRLD Corp – NASDAQ,EZPW, Nelnet Inc - NYSE:NNI, Cash America – NYSE:CSH.

Short selling in Provident Financial Plc – LON:PFG is prominent . Short interest has been rising throughout the year, with a notable increase from 7% to 11% since late July. Institutional investors adopted this sentiment later in August as institutional ownership fell from 34 million to 29 million shares.

The other payday loan lenders that have some short interest are as follows but they have all seen recent short covering. They are Dollar Financial Corp, Portfolio Recovery Associates and World Acceptance Corp—have all been subject to short covering over the year.

Investors in Dollar Financial see short interest fall from 11% to 6% since March. However, it must be noted that there has been a slight increase in short interest from 4% to 6% over the six weeks - let’s not forget that some US States are very anti this type of lending.

World Acceptance Corp’s short base has reduced from 28% to 22% recently. Cash America (CSH) have high short selling (14%) but much of this could be for technical rather than directional reasons due to their convertible bond issuance.

Whilst the majority of companies which offer short-term loans are seeing short covering the key point is that institutional investors (who lend and who we survey) have shown their faith in future growth from these companies by buying big stakes in them. The proportion of shares held in many of these cash cows is in the top decile when compared to the Russell 2000 average and ranges from 25% to 40%. For example, Dollar Financial and World Acceptance have 40% of their shares in the ownership of these long term investors. Other names widely held by this type of investor include EZ Corp, Cash America and Nelnet Inc.

Venture Capital firms like the consumer finance sector too judging by the collection of them advertising their investment in the UK’s unlisted startup Wonga.com . This website makes it look wonderfully easy to borrow small amounts of money quickly. And that is both the strength and weakness of this sector.