Rising delinquencies have made investors wary of most finance company stocks, although the shares of a few cutting-edge consumer lenders are still clearly in market favor.
The split between the haves and have-nots in the field has cut short the good times for specialty finance companies. Prior to the split, many such companies had launched initial public offerings over the past several years and rewarded investors with handsome returns regardless of loan quality. The current market is "more of a stock picker's market," said Joseph Jolson, a Montgomery Securities analyst in San Francisco. "It's the kind of market I like."
While loan quality and reserve problems have hurt the shares of companies like Eagle Finance Corp., of Libertyville, Ill., and Search Capital Group Inc. of Dallas, others - such as Americredit Corp. - have attracted increased investor interest.
In the week leading up to Memorial Day, Americredit's shares jumped 9.4% in value, to $15.75 a share.
Daniel R. Berce, chief financial officer of the Fort Worth-based subprime auto lender, said the difference for his company is the control it maintains over the underwriting process.
"We have a dedicated risk management group that has been responsible for developing a credit-scoring system with Fair, Isaac & Co., which we use to assess the credit quality of applicants," said Mr. Berce. "The risk managers monitor daily the loans we underwrite to determine the risk profile of our approvals on a real-time basis."
Mr. Berce said that despite the subprime focus, the delinquency rate has remained stable since the company's founding in 1992.
This contrasts with those credit card issuers who, in search of higher returns and growth, have targeted a less- creditworthy class of customers. Cracks are beginning to show in this strategy.
Michael Hughes, an analyst in San Francisco for Merrill Lynch & Co., said a number of lenders have told him that the problems associated with the slowing economy are concentrated in the lower economic strata, the kind of customers targeted by these marketing programs.
"It appears that some companies have extended credit to a certain class of people that are not able to manage it," he said. "To the extent you see portfolios showing up with problems, I'm going to bet there are lower- income people in the portfolio mix."
There are exceptions, of course. In particular, Mr. Hughes cited MBNA Corp., whose delinquency rate has declined at the same time others have seen theirs rise.
Home equity lenders have also avoided the problems caused by rising consumer delinquencies.
John Heffern, an analyst in Baltimore with Natwest Securities, said companies lending to this market are in a better position to weather rising delinquencies because of the collateral associated with home equity loans.
But, he warned, the real test is yet to come. Seasonality of consumer lending means that increased lending in the first half of the year may mask loan quality problems.
"The test will come in the second half of the year when things begin to slow down," he said. "There was some of that last year and it did have an impact on stock prices."
