Should You Now Consider Selling Credit Acceptance (CACC) Before its Too Late?

·4 min read

Curreen Capital, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio net return of -5.15% was recorded by the fund for the third quarter of 2021, trailing the S&P 500 and MSCI Word Index which had a 0.58% and 0.06% gain respectively for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Curreen Capital, in its Q3 2021 investor letter, mentioned Credit Acceptance Corporation (NASDAQ: CACC) and discussed its stance on the firm. Credit Acceptance Corporation is a Southfield, Michigan-based finance company with a $9.6 billion market capitalization. CACC delivered a 78.23% return since the beginning of the year, while its 12-month returns are up by 81.44%. The stock closed at $616.07 per share on October 18, 2021.

Here is what Curreen Capital has to say about Credit Acceptance Corporation in its Q3 2021 investor letter:

"During the quarter we sold our positions in Credit Acceptance. We sold Credit Acceptance for a similar reason – the story had changed, and not in a good way. For Credit Acceptance and other subprime auto lenders, the past year has been the best of times, and the worst of times. It is a great time to own subprime auto loans, as a strong labor market, stimulus payments, and high prices for used cars mean that customers are more likely to pay their car loans, and the collateral is more valuable in the cases where customers default. On the other hand, it is difficult to make new subprime automobile loans, because subprime customers with the best credit may now be able to get prime loans, and the cars that are available to buy are more expensive. Subprime auto lenders are now left with the choice of lending more money per car to the least-creditworthy subprime customers, or letting their new loan volume collapse. In the first case, your loan losses may be very high in a few years, and in the second case, your loan book will shrink, and then shrink some more.

Credit Acceptance has opted for the second choice, and its new loan originations are well below last year’s. This shows discipline from management, but it will eventually make it hard for the company to drive earnings growth. In the absence of that earnings growth, I do not want to own Credit Acceptance. We sold our position for $522.71/share. "

Finance, Stocks
Finance, Stocks

Finance, Credit Acceptance Corp.

Based on our calculations, Credit Acceptance Corporation (NASDAQ: CACC) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. CACC was in 20 hedge fund portfolios at the end of the first half of 2021, compared to 23 funds in the previous quarter. Credit Acceptance Corporation (NASDAQ: CACC) delivered a 31.63% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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

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