Today's Wall Street Journal [subscription required] profiled John Paulson who made about $3 billion in 2007 shorting subprime mortgages. He thinks there's still money to be made betting on problems for consumer finance companies that issue credit card or automobile loans.
I mentioned the risk of rising consumer loan defaults yesterday morning on CNBC. The default rate on consumer loans started 2007 at 2% and finished the year at 2.5%. That figure is likely to rise. And Citigroup Inc. (NYSE: C) announced today that it had created a $5.2 billion provision for bad consumer loans. And those provisions are likely to rise by an additional $5 billion to $10 billion.
Paulson's comment got me thinking about how to profit from the collapsing consumer. Since Citigroup is in so many different businesses, shorting it would not be the purest way to play this trend. This led me to publicly traded pawn shops which prey on the poorest people in society. I found that one of the largest pawn shop chains in the country, Cash America International Inc. (NYSE: CSH) could be worth looking at as a way to profit from the collapsing consumer.
There's been a big increase in the number of pawn shop customers not repaying their loans. According to its third quarter 2007 10Q, Cash America more than doubled its cash advance loss provision from $17.5 million in the 2006 period to $43.6 million in 2007. Moreover, its cash is down $4 million from the previous year and its long-term debt is up 20% to $250 million. Finally, were it not for a $16 million profit from the sale of some foreign notes, Cash America's net income would have declined.
Cash America stock has lost 40% of its value in the last year. But at $27.78 -- even after today's 5% decline -- it could have further to drop. A moderate 7.8% of its shares were sold short as of December 11, 2007.
I'm not saying that Cash America is a slam dunk short, but I will be watching its financial reports closely and would not be surprised to see a big rise in its cash advance loss provision when it reports its fourth quarter results.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Cash America.
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