Is Credit Acceptance Corp (CACC) a Smart Long-term Buy?

Alex Smith
·4 min read

On October 12, 2020, Giverny Capital released its Q3 2020 Investor Letter, a copy of which you can download here. The Fund returned 6.50% for the third quarter of 2020. Meanwhile, the benchmark S&P 500 Index gained 8.93%. You should check out Giverny Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Giverny Capital highlighted a few stocks and Credit Acceptance Corp (NASDAQ:CACC) is one of them. Credit Acceptance Corp (NASDAQ:CACC) is an auto finance company providing automobile loans and other related financial products. Year-to-date, Credit Acceptance Corp (NASDAQ:CACC) stock lost 23.2% and on October 23rd it had a closing price of $339.64. Here is what Giverny Capital said:

"Credit Acceptance offers automobile financing programs to car dealers who sell to financially struggling customers. A Credit Acceptance borrower in many cases has been rejected by every other subprime lender for a car loan, and literally has no other options for financing a used car. The borrower is so shaky that when pandemic first struck in March, one prominent short seller predicted Credit Acceptance would go bankrupt. Instead, government stimulus stabilized the market. Credit Acceptance’s stock reached an all-time high of $539 in August.

Credit Acceptance loans people money on punitive terms. The customers are often buying from sketchy car lots and may overpay for clunker autos, which they then finance at high cost. Some of them will end up defaulting on their loans, and when they do, their lender proves a tough adversary, pressuring borrowers to keep paying even if their car is not running.

We’ve owned this stock personally for some years and have met management several times. We think management is responsible and note that Credit Acceptance is a regular member of Fortune magazine’s 100 Best Places to Work list. Customers who pay off their loans rebuild their credit when no one else would loan to them and the investors who put their capital at risk earn good returns in a volatile segment of lending that is known more for failure than success.

Over the years, numerous critics have assailed Credit Acceptance for exploiting vulnerable borrowers. In September, it was sued by the state of Massachusetts. The stock plunged after the suits were filed and on Sept. 30 it closed at $338, down $200 in a month. Lawyers will have no trouble finding sympathetic borrowers who felt pressured to pay off loans on awful cars. The defense may have a harder time persuading a jury that because most of those borrowers had a history of defaults on other loans, they could not have financed a car without a lender willing to take significant risk. If Credit Acceptance is prosecuted or legislated out of its niche, it seems unlikely that its borrowers will find better alternatives.

In early October, Credit Acceptance disclosed in a regulatory filing that its loan collections this year are above expectations and that it may raise money in a debt offering. We notice that the company’s debt is stable and trading above par; it appears to have ample access to low-cost funding. The credit market is calmer about this situation than the stock market, in other words."

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In Q2 2020, the number of bullish hedge fund positions on Credit Acceptance Corp (NASDAQ:CACC) stock increased by about 5% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in Credit Acceptance's growth potential. Our calculations showed that Credit Acceptance Corp (NASDAQ:CACC) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.