Wednesday, January 7, 2009

Pawn Shops - Something is Up

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We sold off some of our EZCORP (EZPW) yesterday and the stock has taken a big hit today - down 12%.

It is right at support but there is something that is affecting the entire sector - the "big 3"

Cash America (CSH): -10%
EZCORP (EZPW): -12%
First Cash Financial Services (FCFS): -12%

I would assume something is happening in Washington D.C. in terms of payday loan legislation but I don't know. The problem with these stocks is they all have payday operations so you are stuck with that business, along with the pawn shop business you actually want to own. If any reader happens to see something cross a wire or an analyst report feel free to email me or add a comment.

I added a small touch back here ($14.90s) from what I sold yesterday (I targeted $15 as a nice place to buy back my position - just didn't expect it to happen within half a day) since the drop has been so severe, but will hold off further until I see what the "news" is ... someone knows something. And that someone is not me.

EDIT 12:10 PM - my crack staff of analysts (err, readers) already responded - the apparent reason can be found here in the comments section.

EDIT 1:50 PM - more info from AP (Mark's note: time to see how influential payday lenders lobbyists are)
  • Shares of payday lending companies EZCorp Inc., Cash America International Inc. and First Cash Financial Services Inc. slid Wednesday amid growing expectations that President-elect Barack Obama will tighten regulations on the industry.
  • In an investor note Wednesday, Sterne Agee analyst Henry Coffey Jr. highlighted a written statement from Obama about the incoming administration's economic plans, including a pledge to "cap outlandish interest rates on payday loans and improve disclosure."
  • The statement also says Obama plans "to extend a 36 percent interest cap to all Americans" and "require lenders to provide clear and simplified information about loan fees, payments and penalties."
I'd like to add that with the default rate of many people who visit payday lenders, there will be no business at 36%. I've investigated this business very in depth in a "real world" (non investing) angle - the default rates are immense. While 400% is egregious, 36% is not a rate that will be profitable considering default rates many times in the 30-70%+ range. These are people with FICOs in the 450-550 range much of the time i.e. they don't pay you back for long.

Long EZCORP in fund; no personal position

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