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