The days of easy credit are essentially over. The recession took
a substantial toll on the financial services industry which remains
at war with itself - and consumers are bearing the brunt of the
As companies large and small struggle to redefine good business
practices and figure out how to serve the customer without going
broke, many consumers that had been previously spoiled by easy
credit are now hurting. Many that didn't lose their jobs and homes
during the recession are living paycheck to paycheck.
So investing in the financial services sector right now is
sketchy at best - and downright insane in most cases.
But markets have a funny way of allocating capital to beaten
down sectors, and one financial services microcap in particular has
caught investors' attention.
***That company is
CompuCredit Holdings (Nasdaq: CCRT)
, an Atlanta-based company that provides financial services to
those less-than-prime customers that have been abandoned by the big
As part of its business strategy, CompuCredit contracted with
credit-card issuers to provide consumer accounts. The firm would
then purchase the receivables from those financial institutions.
But in the current credit-crunch environment, much of this business
no longer appears feasible.
According to CompuCredit, 1-in-4 Americans have a FICO score
below 650, the level generally regarded as the cutoff point by
traditional lenders. But underserved markets create opportunities
for growth, and CompuCredit says its goal is to serve the 75
million underserved consumers.
Achieving this goal carries a hefty price - hence the question
about this strategy's viability right now. For the June quarter
CompuCredit reported a net loss of $29.6 million. However, SEC
filings also showed an allowance for uncollectible loans of $48.5
million, a 10 percent improvement since December.
Before the recession, CompuCredit was gaining ground - and
recognition. In 2004-06, it was on the Georgia 100 Best of Business
list, and in 2005-06 it made Fortune Magazine's list of 100
***But CompuCredit has a bit of a checkered past. In December
2008, it paid $114 million to the Federal Trade Commission (
) to settle charges of deceptive marketing practices involving its
subprime credit cards. When the Credit Card Act of 2009 took effect
in February, the high-fee products offered by CompuCredit and other
subprime credit card lenders were outlawed.
However, a website that follows the credit card industry,
, reported in February that CompuCredit was no longer marketing its
So where is this company headed, and who cares?
Let's handle the second question first...
contributor Market Folly, hedge fund Second Curve Capital has
amassed a pretty nice position in CompuCredit and now holds 4.1
million shares, or about 11.5 percent. The fund is operated by Tom
Brown, who previously ran the financial services portion of Tiger
CompuCredit's share price has risen 80 percent this year, but
earnings are nonexistent. For the June quarter, the company's loss
amounted to 73 cents a share, an improvement from a loss of $2.81
the year before.
So with a gloomy balance sheet, what might Second Curve be
***CompuCredit Holdings does have a few positive metrics. With
the stock trading around $6, the stock has a
price-to-free-cash-flow ratio of 1x, as pointed out at the
website. Typically, a low ratio means better value.
Last December, the company issued a special $0.50 per share
dividend, and also said it was considering a tax-free spin-off of
its micro-loan businesses in the U.S. and the U.K. Those are
primarily payday-lending companies for the underserved consumer.
The proposal states that a subsidiary, called Purpose Financial,
would take up the micro-loan business and become publicly
The proposal launched a flurry of lawsuits against CompuCredit,
claiming that the spin-off would excise the only part of its
business that's generating cash. It still faces regulatory
***But CompuCredit seems to be cutting through the muck and mud
to get set for something. In May, the company completed a "modified
Dutch auction" of debt due in 2025 and outstanding shares at $7
apiece. It reacquired $85.3 million in stock and $14.7 million of
the senior notes.
I don't know exactly what will transpire with CompuCredit, and
wouldn't suggest you run out and buy the stock without further
research. But the company's recent activities, and the sizeable
ownership of Second Curve, suggest that something is brewing in the
financial services sector right now.
***It's always wise to do your homework, because you never can
tell what is motivating a hedge fund or other investor to plunk
down their cash for stock. If you'd like some help with your
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