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A used car dealership in Jersey City, New Jersey
Angus Mordant/Bloomberg News
Andew Left, a famed short seller and founder of Citron Research, doesn’t mince words when he’s got a gripe with a company’s stock price or business practices.
Right now, he’s got shares of Credit Acceptance Corp CACC, -0.61% in his crosshairs, one of the nation’s largest subprime auto lenders. Left views the stock as overvalued, particuarlly as scrutiny from regulators about its collection practices intensifies.
“I don’t short stocks out of a sense of morals,” Left told MarketWatch about his rationale for this “modest” short position. “But in my research, I’ve spoken to enough of their customers to have sympathy.”
What bothers Left is not only the routine hazards of the used-car market, its markups on vehicle prices or the roughly 20% rates of interest charged by Credit Acceptance.
It’s also now about a subprime lender that he sees as continuing to deploy sharp collection tactics during the pandemic, as many American consumer lenders granted temporary pauses on interest or monthly payments and other forms of relief to impacted borrowers.
“They could have not been charging interest to nurses or first responders,” Left said of Credit Acceptance, or made other changes to their business to accommodate other hard-hit borrowers by the pandemic.
Credit Acceptance did not respond to a call or email from MarketWatch asking for a response to a list of Left’s claims.
But their top brass recently offered some insights to Wall Street analysts who pressed management for more detail on its business during the pandemic.
“So we, like we always do, work with customers that are having difficulty making their payments. The objective is to keep the customer in the vehicle,” said Brett Roberts, chief executive officer, during the company’s July 31 second-quarter earnings call.
But Roberts also stressed that the company’s collection rates lately were better than pre-pandemic levels, despite the millions of lost jobs and a crisis that’s once again hit Blacks and Hispanics the hardest.
For the first half of 2020, except for March when they dipped 1.3%, Credit Acceptance reported “front-end” collections, or what it collects on current or modestly past-due loans, that were nearly 8%-19% higher, per month, compared with the same period 12 months earlier.
“So early innings, things look pretty good,” Roberts said, adding that pandemic stimulus from the government has been a key. “I think if you had asked me back in March if I thought we’d be in this good a position, I would have said no. But also keep in mind that it’s very, very early and this is going to play out over a long period of time.”
To be sure, tough collections, which for subprime lenders often includes a “kill switch” that can immobilize a vehicle immediately following a missed payment, have been a key reason many investors have flocked to Credit Acceptance’s stock and bonds.
Credit Acceptance’s stock was up 3.9% on the year to date Friday, while the blue-chip Dow Jones Industrial Average DJIA, +0.56% closed up 0.4% for the same period, after joining the other major U.S. stock benchmarks in positive territory.
Investors bought top AAA-rated asset-backed bonds issued by Credit Acceptance in July at yields of just 1.38%, or lower than the 2.03% yield on similar bonds sold in mid February, according to Finsights, a bond and data tracking platform.
Its near $500 million bond deal in July is backed by used car-loans, where borrowers had an average credit score of 546, or subprime, and a 22.3% rate of interest, according to Moody’s Investors Service.
“In their defense, people need a car,” Left said of Credit Acceptance. “But here’s a company that could do more. For its borrowers, their car is everything. It’s their biggest asset, their lifeline to a job.”
During his research, Left recalled a woman working at a major big-box retailer, earning less than $500 per pay period, while getting $140 garnished on a car that Credit Acceptance repossessed three years ago.
“They loan money to people who can’t afford it,” Left said, pointing to a typical Credit Acceptance borrower who he found to be often low-income, Black, a single mom or someone a medical bill away from financial ruin.
Left thinks it’s time to short Credit Acceptance stock, which has been trading about 4.5 times book value, versus 0.9 times for Goldman Sachs GS, -1.16% and 1.1 times for subprime lender Santander Consumer USA SC, +1.30%.
In part, he warns that leeway granted to subprime lenders in the past couple of years by a deregulation-focused Trump administration could end Democratic challenger Joe Biden wins November’s presidential election, which could mean a bolstered Consumer Financial Protection Bureau and constrained subprime lenders.
Read: Consumer complaints to the CFPB are skyrocketing as the coronavirus outbreak continues
There’s also the string of state -led probes. On Aug. 11, Credit Acceptance disclosed in a public filing that it received a subpoena from Maryland’s attorney general for additional requests for information around its originations and collection policies, and stated that the investigation had been expanded to include 39 other states.
Maryland’s AG and others already had subpoenaed the company for information in March 2016 and again in April 2020.
“We are cooperating with these inquiries and cannot predict the eventual scope, duration or outcome at this time,” the company said, as part of its Aug.11 disclosure. “As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from these investigations.”
Left’s short bucks a trend. Here’s a snapshot of the outstanding short-interest in Credit Acceptance stock, which was at a multiyear peak in 2017.
Short interest in Credit Acceptance stock
Source: FactSet
Left said he “understands the fact that there’s a good chance we get a Trump win and nothing happens to the CFPB.”
