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Citron says that this company is "a potential ZERO!!" but I'm not so sure



May 15, 2009 – Comments (12) | RELATED TICKERS: WRLD , AEA.DL , EZPW


The website Citron Research has a pretty good track record of sniffing out companies that have something shady going on or are overvalued.  It's latest target is a company called World Acceptance Corp. (WRLD).  Forgive me if someone has already mentioned this one.  I haven't seen it.

This company's stock has been nearly cut in half since Citron published its initial report on World Acceptance on May 7th. Of course, this coincided with some general weakness in the markets...but remind me to scrape up a few quick CAPS points the next time these guys issue a report on someone.

Citron believes that WRLD is "a potential ZERO!!"  Going from $17 and change to $0 would be a nice chunk of CAPS points.  I am considering freeing up some space in my CAPS portfolio to short WRLD, but I'd like some feedback from other CAPS players who are familiar with the company first. 

Here's a summary of Citron's bear case for the company:

1) The possibility of the company losing two class action lawsuits.

2) Significant insider selling.

3) That the company's business practices are so offensive that the Obama Administration will likely pass laws that severely hamper its ability to conduct business in same manner in the future.

I am not very familiar with the company, but apparently World Acceptance issues small unsecured “installment” loans that average under $1,000 a piece, mainly in eleven southern states and Mexico.

To me this doesn't sound very different from the business model that a number of other public payday loan companies and pawn shop operators employ, including EZCORP Inc. (EZPW), First Cash Financial Services Inc. (FCFS), Cash America International, Inc. (CSH).  Another public company that I am unfamiliar with named Advance America (AEA) is in this sector as well.

The Citron report singles out WRLD as a "loan flipper" but to me all of the companies in this sector are somewhat predatory in nature.  Of course they charge high interest rates, they also take on a lot of risk in giving out unsecured loans.  These businesses might be scummy, but right now they appear to be completely legal.  It sounds to me as though the entire Citron short case is based upon the hope that the current Administration continues the crusade for consumer protection that it started with credit card companies and targets loan shark-like payday loan companies next. 

It may very well be true that World Acceptance's loan book is as Citron puts it "the least collectible, lowest quality asset of any public company we know.  It is our opinion that the book is worth not even 10 cents on the dollar if put into runoff, while new legislative initiatives and judicial challenges bring that risk much closer to reality."  I highly doubt that the folks at Citron are seasoned loan officers or purchasers of distressed debt, so one has to wonder how qualified they are to value this company's loan portfolio that accurately.  I suspect that they are just pulling a random number out of their arse.  Besides everyone already knows that payday loans are risky and hard to collect.  Citron doesn't bring to light any facts that illustrate that WRLD's extremely risky loans are any worse than Mr. Market believes that they are.  Only an idiot would buy stock in this company and not realize that these are it makes unsecured loans to people in dire financial situations.

One could argue that the implosion in the economy will make it more difficult for WRLD to collect on its existing loans, but in a way the bad economy might actually be good for its business...creating a boatload of new, desperate people who need payday loans that can keep this thing going.  Again, this business certainly is distasteful, but technically it is legal.

A change in the lending laws brought about by the new Administration is a solid theory and it may very well happen, but I don't think that this short idea is up to Citron's normal standards.  Legislative risk has always been there for companies like these.  That's why it's only trading at under five times earnings.  This company's definitely not for me, but I really don't see a strong likelihood that it is going to zero any time soon like Citron lays out in the first sentence of its case against it.

The class action lawsuit...which as a side note I personally often find as distasteful as this company.  The lawyers who originate class action suits usually pocket millions of dollars while the shafted consumers receive a crappy coupon for $5 off of their next purchase or something like that.  I digress.  The class action lawsuit is a little more problematic for me because as the bear case states it might encourage people with outstanding loans to World to hold off on paying them when they receive notification about it.  And of course it has the potential to force the company to pay out a hefty sum in damages.

Citron definitely appears to be more poorly run than some of its competitors.  It has lower revenue on much higher receivables, but it is also trading at half the multiple of EZ Corp. and a 50% lower multiple than Advance America.

Anyhow, it's amazing what one can learn by writing.  I went into this blog post seriously considering shorting WRLD because "Citron said so," but after reading its reports and writing down my thoughts here Citron's case against the company sounds pretty weak to me.  Most of the things that Citron says about World Acceptance are either already known by the market, priced into the stock, or pure speculation about what might happen in the future.

Don't get me wrong, I'm certainly not defending World Acceptance's business model.  I think that it has a shady business and that they sound like a bunch of scumbags...I just don't see the slam dunk this stock is going to zero soon that Citron purports it to be.

I'd love to hear others' thoughts on this company.  I wonder if Citron is just living on its reputation and shorting the heck out of stocks that it writes about itself making a nice, short-term profit.  I'll have to look around its site to see if it has any disclosures on its site (as if they would matter anyhow, because who enforces them?).  They certainly have quite a quite a following.  A million people shorted the company here on CAPS merely because "Citron said so."

I'm trying to think on my own here and not just act because someone said to do something.


12 Comments – Post Your Own

#1) On May 15, 2009 at 4:25 PM, TMFDeej (97.48) wrote:

FWIW, this is from Citron's site:

"The principals of Citron Research most always hold a position in any of the securities profiled on the site.  Citron Research will not report when a position is initiated or covered. Each investor must make that decision based on his/her judgment of the market."

You think that payday loans are a shady business model? How about this one.  Write up a few outstanding bear cases against some shady companies and watch their stocks implode and then ride on your laurels writing short reports that don't say anything new about companies and reap huge profits as the lemmings in the market follow your lead and short or sell it. 

Talk about adding no economic value whatsoever.  I hope that this fellow(s) does something that's actually productive on the side and that this isn't their main job.  I suppose that he's sort of like a reporter and that exposing legitimately fraudulent companies is valuable, but something about this just rubs me the wrong way.

It's sort of like those quants that write programs that try to skim a penny here and a nickel there off of the market.  What a freaking waste of a talented individual.  That sort of person should be smart enough to do build or create value, but instead they're just a leech.

Oh well, who am I to pass judgment on others?  I just call 'em like I see 'em I suppose.

Have a great weekend everyone.


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#2) On May 15, 2009 at 4:58 PM, portefeuille (98.91) wrote:

Going from $17 and change to $0 would be a nice chunk of CAPS points.

Going from "anywhere but $0" to $0 would do the same (if you "apply" an "underperform" rating).

Not that important, I know. Have a nice weekend ...


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#3) On May 15, 2009 at 5:01 PM, portefeuille (98.91) wrote:

Going from "anywhere but $0" to $0 would do the same (if you "apply" an "underperform" rating).

Unless, of course, you want to use this stupid restarting thing ...

(and "but $0" is redundant as long as the rules of the "caps" game do not change)

Again, have a nice weekend!

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#4) On May 15, 2009 at 5:02 PM, TMFDeej (97.48) wrote:

You're absolutely right, port.  I am kicking myself for not reupping my several year old GM short when it was right around the $1.50 limit to double dip on the points.

I guess that my point should have read a stock that's at $17 has the potential to generate a lot of points even if it doen't fall all the way to zero.

Thanks for reading.  Have a beer on me :).


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#5) On May 15, 2009 at 6:40 PM, goldminingXpert (28.62) wrote:

It already has dropped by what, nearly half? It doesn't have to go to zero for Citron to be right. I doubt they're going to zero, but they're certainly headed for the single digits.

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#6) On May 15, 2009 at 7:07 PM, CarDork (< 20) wrote:

The media manipulates again.

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#7) On May 15, 2009 at 9:49 PM, ChrisGraley (28.48) wrote:

Shorted them about a week ago.  My reasons were just a combination of things really. First I despise these Pay Day loan companies, because they take advantage of the neediest and most uneducated group in society. But even though they are dregs on society, and for the time being, legal loansharks, I wouldn't let that affect my rating of their financial viability. I hate those "buy here pay here" lots that have already made back their investment in the  car with some suckers down payment and then reap nothing but profit on the guy's weekly payments until it's time to repo the car and start the next sale with 100% profit as well.

The reason that I shorted these guys is that...

1) These are the riskiest loans you can find in a bad market and something tells me that they aren't gonna get any TARP money.

2) Besides the  class action suits, States were threatening Pay Day loan companies before the market tanked. I could see a lot of politicians looking to use them as a scapegoat. If enough States pile on for political gain, litigation costs alone could be enough to bankrupt them. Loan flipping has some legal implications in some states and this is from their 10K.

In fiscal 2008, approximately 83.0% of the Company’s loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. The Company actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized. For fiscal 2008, 2007 and 2006, the percentages of the Company’s loan originations that were refinancings of existing loans were 73.3%, 74.3% and 75.6%, respectively.

3) Correct me if I'm wrong here, but given that 83% of their entire loan portfolio had to refinance with them at least once, I'm guessing a lot of the profits they're showing are just paper gains. It also has the side effect of making their default ratio look artificially low. Forget what the States might do, this might generate some interest with the SEC.

4) Huge insider selling, even after a pretty good 8K.

5) They have a half billion dollars in outstanding unsecure loans to the riskiest people on earth that have refinanced on average 4-5 times and they only have 6 million in the bank. Yeah this is gonna end well.


Hope that helps your decision.


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#8) On May 17, 2009 at 10:18 AM, TMFDeej (97.48) wrote:

Gold, I think that the stock was cut in half BECAUSE of the Citron said to short it...not because of the information that the report contained.  Who knows how many people shorted it because "Citron said so" and how many shares it shorted on its own.

Bashing a stock, shorting it yourself, and having your lemming-like followers short the heck out of it as well does not make Citron "right."  It makes it the cause of a short-term movement in a company that it is likely profiting from even if it was technically "wrong."


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#9) On May 17, 2009 at 6:11 PM, JakilaTheHun (99.92) wrote:

A lot of top CAPS players blindly follow Citron to their own detriment.  Citron has a good record, but they are not always right (contrary to popular belief). 

I still remember everyone rushing to red thumb Lifetime Fitness (LTM) after the Citron report.  Nevermind the fact that Citron dug up absolutely nothing substantive on the company.  LTM had already been beaten down well below net tangible assets and Citron's entire case rested on them being 'the next Bally's Fitness' and 'fitness centers not having any chance at being profitable over the long-term.' 

Meanwhile, Citron castagated LTM for their biggest advantage over competitors: NO LONG-TERM CONTRACTS!  Citron claimed this would doom LTM --- much to the contrary, it is the one thing that helps them succeed in this environment.  No one wants to sign a one-year contract for expensive fitness center services in this economic environment.  But hey --- maybe we'll do it this month and then, we'll think about it next month.  That's why LTM is still doing alright. 

I briefly considered green thumbing LTM when it was below $9 (while everyone else was red thumbing), but didn't have the guts.  I felt it should be worth at least $15 - $20 and had potential to go back upwards to the $40 range.  They do have some issues and I'm not totally trusting of LTM's management, but Citron, I think, will be wrong on them.

As far as Worldwide goes, I had similiar thoughts to you.  I do think their business is kinda scummy, but I don't see anything illegal about it.  Also, Citron makes a huge logical error --- one that many other investors are making with credit card companies.  They assume that because Worldwide will have a high rate of default, that this automatically means they are unprofitable.  This is not true.  If you charge enough interest to offset the high rates of default, you can still make money. 

Worldwide strikes me as legal loan sharking.  I'm actually more neutral on this one than I was on LifeTime.  I thought Citron had a good chance at being wrong on LTM from the get-go --- this one, I could go either way on.  Citron does bring up some valid points, but they also ignore the company's fairly decent financials and as you say --- they overly rely on the belief that policymakers are going to stomp this down without much of a justifiable basis.  We'll see.  I would've been tempted to red thumb at $30, but now that it's already plummetted, I'm afraid to touch it.  It has too much potential to come back at this point.

I give Citron 60-40 odds on this one.  I think they'll win, but I'm not convinced enough to put down the red thumb given the huge risk that it will skyrocket back upwards if they are wrong.

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#10) On May 21, 2009 at 12:18 AM, evenking (< 20) wrote:

It’s nice of you guys to associate WRLD immediately with evil by comparing it to the devil du jour, payday lending.  High-risk loans are a necessity, for the people that no one else will lend to. Banning them or creating such social stigma that they can’t be used doesn’t eliminate the need for credit-less people to borrow money, especially now that more and more people are losing credit.


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#11) On September 19, 2009 at 5:13 PM, PdoBear (25.36) wrote:

"You think that payday loans are a shady business model? How about this one.  Write up a few outstanding bear cases against some shady companies and watch their stocks implode and then ride on your laurels writing short reports that don't say anything new about companies and reap huge profits as the lemmings in the market follow your lead and short or sell it. 

Talk about adding no economic value whatsoever.  I hope that this fellow(s) does something that's actually productive on the side and that this isn't their main job." -TMFDeej

Sad. TMFDeej thinks that Citron doesn't perform a service. They often do the job the SEC should, but doesn't, do. On a net basis, upward speculators (The Motley Fool included) add "no economic value whatsoever" either. They often allow companies like Enron, Lehman Bros., and Worldcom to steal billions in retirement funds by acting as poorly informed cheerleaders. 

Speculation advisor equals value adder? You're not exactly building hospitals in Africa.


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#12) On March 20, 2010 at 4:23 AM, MiamiStuDog (< 20) wrote:

Just want to point out that anyone who bought WRLD on the day this was originally posted would have made an 89% return through Mar 19, 2010.

 However well thought out the analysis above was, it shows that you can trust neither the experts nor the herd.

 I'm ending my overperform on WRLD today, because I believe it's gotten overvalued and that that future earnings are going to slip.    I think it could still be a Buy below $32.    Am I right?   Who knows?

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