Predictions of a 2020 recession have increased in recent months amid little progress in U.S.-China trade discussions, lackluster economic data, and several inversions of the yield curve – an event that has proceeded every recession since 1956.
If a slowdown does occur, companies that offer alternative financing options, such as rent-to-own stores and pawnshop lenders, should tend to outperform, cashing in on consumers needing quick money to pay bills and manage their daily spending. Jefferies analyst John Hecht recently wrote in a research note that these stocks provide "a hedge to standard recessionary pressures that cause most stocks to decline," as quoted by Barron's. "Alternative financial services companies' business models tend to have resilience during a downturn, and thus the equity values perform relatively well," he wrote
Hecht argues that times of economic hardship give non-prime lenders an opportunity to attract more creditworthy customers while retaining their traditional customer base due to banks and credit card companies tightening lending standards.
As outlined in the Barron's story, the analyst favors three stocks in the space: lease-to-own firm Aaron's, Inc. (AAN), along with pawn stores EZCORP, Inc. (EZPW) and FirstCash, Inc. (FCFS). Let's review the recent earnings of each company and look at several trading ideas to haggle out gains if the dreaded "r" word hits next year.
Aaron's, Inc. (AAN)
Aaron's operates retail stores that engage in the lease ownership of furniture and electronics. The Atlanta-based company also offers lease-purchase solutions and credit products to customers who may not qualify for traditional prime lending. Aaron's reported second quarter earnings per share (EPS) of 93 cents, beating analysts' expectations by a nickel, while revenues of $968 million for the period grew 4.3% on a year-over-year basis. On the back of its positive quarterly results, management raised full-year (FY) 2019 guidance for earnings to come in between $430 million and $452 million compared to the prior forecast of between $415 million and $442 million. Aaron's stock has a market capitalization of $4.24 billion, offers a small dividend yield of 0.22%, and brokered an impressive year-to-date (YTD) gain of 49.37% as of Sept. 6, 2019.
Aaron's stock has continued trending higher after the 50-day simple moving average (SMA) crossed above the 200-day SMA in February to generate a "golden cross" buy signal. Over the past month, the price has traded sideways and now finds support from a trendline that extends back to the late December 2018 low. Those who buy at these levels should place a stop-loss order beneath last month's low at $59.55 and consider using a trailing stop to book profits. For example, traders could raise stops beneath each subsequent higher swing low to let profits run.
EZCORP, Inc. (EZPW)
With a market cap of $435.8 million, EZCORP offers pawn loans as well as short-term unsecured loans and other consumer financial products through three business segments: U.S. Pawn, Latin America Pawn, and Other International. The pawnbroker posted third quarter adjusted EPS of 18 cents to deliver a 20% earnings surprise. Although revenue for the period fell short of Street expectations by $7 million, the company's top line still increased 1.3% from the year-ago quarter. During the earnings conference call, Chief Executive Officer Stuart Grimshaw said that the company planned to expand its operations through store growth and higher-return merger and acquisition (M&A) opportunities, along with investing in digital engagement and data analytics programs. As of Sept. 6, 2019, EZCORP stock is trading relatively flat for the year.
The pawn company's shares started 2019 on a positive note, jumping 21% in January. After a lackluster March, the stock made another leg higher in April but has traded within a descending channel since. A retracement to the pattern's lower trendline at $7.75 provides traders with a high-probability entry point. Those who take a trade should set a take-profit order near the channel's top trendline around $9.75. Protect capital by cutting losses if price fails to hold the Sept. 3 low at $7.69. The trade provides an enticing risk/reward ratio of 1:10.5 ($1.89 profit per share vs. 18 cents of risk per share), assuming an execution at Thursday's $7.86 closing price.
FirstCash, Inc. (FCFS)
FirstCash operates over 2,600 retail pawn stores in the United States and Latin America. The 31-year-old company generates revenue by lending money on the collateral of pledged personal property and retails merchandise acquired through collateral forfeitures on forfeited pawn loans. FirstCash also melts scrap jewelry, as well as sells the gold, silver, and diamonds in commodity markets. The pawn store's Q2 earnings came in at 82 cents per share to top Wall Street estimates by a penny, while the company's top line surpassed expectations by 0.79%. FirstCash has increased the lower end of its FY 2019 guidance for adjusted EPS by five cents, based on YTD strength in core pawn earnings. The $4.31 billion company pays a 1% dividend yield sports a healthy 39.56% YTD return as of Sept. 6, 2019.
FirstCash shares motored sharply higher between late December and July but have consolidated over the past month and a half. While moving sideways, a symmetrical triangle has formed, with the pattern's lower trendline also part of a longer-term uptrend line. Traders may decide to wait for a breakout above the triangle's top trendline before committing capital. Those who do take a position may want to think about using a fast period moving average as a trailing stop to ride upside momentum as far as possible. Manage risk by placing an initial stop underneath support at $95 and amending the order to the breakeven point if the stock rises above its all-time high at $106.53.