The Bull

Tuesday 23

April, 2019 2:15 AM



TheBull PREMIUM

  • Trends
  • &
  • Opportunities

Stocks that Could Benefit from an Economic Downturn

Stocks that Could Benefit from an Economic Downturn

By Bob Kohut 28.01.2019


On the morning of 24 January US investors awoke to the news from financial outlet CNBC featuring a troubling interview with US Commerce Secretary Wilbur Ross.  In the interview Ross commented on upcoming trade negotiations between the US and China:

• We are still miles and miles from getting a resolution…

US markets have bounced up and down on any hint, positive or negative, of a US/China resolution of the trade or tariff war between them.  Predictably the Dow Jones Industrial Average (DJIA) – the most influential index in the world – dropped 100 points at the open, went positive within the first hour of trading before slipping back into negative territory.

The daily financial news out of the Davos World Economic Forum offers investors a steady diet of opinion on the global growth story for 2019, much of it negative.

Truth be told, bullish sentiment has a way of blinding investors eager for growth from the full import of negative news.  Navigating a bear market is a more difficult task for the average retail investor than thriving in a bull market.  Hence given a choice, some investors prefer to believe market experts pushing the bull case.

A case in point is the potential of a slowdown in the Chinese economy.  Some Australian experts are promoting the idea the Chinese government will do anything to keep a major economic downturn from happening, given their obsessive fear of the social unrest that could be unleashed.  Yet there is growing evidence the Chinese economy may be stalling, some of which is falling under the financial news radar.

December and early January exports from Japan, South Korea, Singapore, Thailand, and Indonesia dropped sharply, attributed to the slowdown in China.  Japan’s exports fell 7%.  Since the start of the year, South Korean exports fell 14.6% with a 22.5% fall in exports to China, while global stock markets were rebounding.

In Australia the housing market continues to decline, putting heavily indebted Australian property owners who bought at high levels at risk.  At the close of Fiscal Year 2018 in June Australia household debt to income ratiowas creeping towards 200%, “one of the highest in the world” according to UBS analysts.  From the abc.net.au. website:


Despite the trade war, the China slowdown, the Australian property market woes and high household debt, more than half of economists surveyed by the Wall Street Journal (WSJ) in January expect slower growth, but no recession, with a 2020 recession possible.  The as yet unsettled partial government shutdown in the US could impact GDP growth in the US, a possibility likely not considered in the 10 January WSJ survey.

Investors with available cash or those with winning stocks where profit-taking seems prudent may take a moderately contrarian viewpoint and consider investments in stocks likely to benefit from an economic downturn here in Australia.

If you are looking for the classic “recession proof” stock, stop searching as there are only varying degrees of risk in downturns.  Even the widely acknowledged “best stock” on the ASX – healthcare powerhouse CSL Limited (CSL) dropped slightly in the bloodbath immediately following the GFC, but quickly recovered.

There is one class of stocks that stand to benefit in tough times, and they are the debt collection stocks.  If slowing growth globally leads to higher unemployment in Australia and rising interest rates put more indebted consumers in a precarious position, companies that offer solutions to consumers and businesses suffering from uncollected debt could prosper.

There are no longer any “pure play” debt collectors on the ASX, with all the major players now offering consumer credit in one form or another as well as debt collection.  They are all worth a look. look.  


Credit Corp Group Limited (CCP) and the more recent (30 May of 2014) entry to the sector Pioneer Credit Limited (PNC) both have OUTPERFORM analyst consensus ratings while Collection House Limited (CLH) has a HOLD recommendation. 

Long term investors who jumped into CCP and CLH immediately after the GFC have seen stellar gains, with the 250% increase at CLH dwarfed by the massive 5,500% increase in the share price of CCP.


Credit Corp Group helps businesses large and small and local governments recover unpaid debts as well as assisting consumers in getting out of debt.

The company assists business customers in two ways.  In the first, Credit Corp Group buys unpaid debt in a debt sale, leaving Credit Corp Group with the task of recovering some or all of what is owed in these Purchased Debt Ledgers (PDLs). 
 
The obvious advantage to the businesses in selling their debt is it frees the companies of the substantial cost of recovering debt using their own resources.  In the second instance, Credit Corp Group essentially acts as a debt collection agent for the business customer. 

The legalities involved in collecting debts owed to local government entities requires specialised services, available through Credit Corps Group’s subsidiary Legal Force Specialist Debt Collectors.

For consumers the company offers hardship assessment as well as debt repayment plans and debt consolidation loans.  Credit Corp Group also offers a variety of consumer loans for the credit challenged.  The consumer operations accounts for approximately 20% of the company’s revenue.

CCP has increased both profit and revenue in each of the last three Fiscal Years. The company’s entry into the highly competitive US market returned its first profit in the first half of 2018.

Collection House Limited (CLH) lags behind Credit Corp Group on every metric in our table.   The company’s revenue and profit has been up and down of late but did show a 3% increase in revenue along with a healthy profit increase of 50% from FY 2017 to FY 2018.

Collection House is broadly diversified with a major focus on business customers, offering eight services ranging from traditional PDL purchases and debt collection services for business and local governments to credit management training for its client customer collection employees to specialised legal and insolvency services and finally, debt consolidation loans and personal loans for consumers.  

The company got into the consumer lending space recently with a subsidiary – ThinkMe Finance – and took an additional step on 22 January announcing an $8.5 million-dollar investment in a digital banking startup new to Australians – Volt.  Investors were unimpressed as the deal appears to be a marriage between two broadly disparate entities.  However, Collection House management hailed the deal as providing the company with the opportunity to expand its collection services and analytical services division.  Collection House anticipates adding $3 million dollars in profit from the Volt deal by 2020.  Volt is in the financial news now, largely due to its status as the first digital, or neo-bank, in Australia to get a full banking license from the APRA (Australian Prudential Regulation Authority).

Pioneer Credit (PNC) has been on the ASX for less than five years but the company’s growth prospects are promising, with the best earnings and dividend forecasts among the three.  The company’s trailing twelve-month P/E of 11.2 bests the sector average of 12.47 and its P/EG (Price to Earnings Growth) of 0.53 is especially attractive to both traditional growth investors and growth at a reasonable price (GARP) investors. 

The company had a banner year in FY 2018, with revenues rising from $56 million to $80 million and profit up to $17 million from $10 million in FY 2017.

Like the other players in the space, Pioneer’s principal focus is on PDLs but in 2016 the company expanded into the consumer lending space and now offers loan finder services for home, auto, refinancing, renovations, and real estate investing, in addition to debt solutions.  In its first full year in the consumer space Pioneer loans amounted to $6 million dollars which along with the company’s service offerings generated $1.9 million in revenue. 

Another stock of interest is strictly consumer focused FSA Group Limited (FSA).  The company has no major analyst coverage according to Reuters and therefore no growth forecasts, but it has been in business since 2000 and its consumer focus eliminates the risk of PDLs that go uncollected.  The company offers a variety of debt solutions for indebted customers and also offers personal loans for “non-conforming” clients who do not meet lending standards required by traditional banks.  

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter


FROM THE NEWSLETTER

Smart Money Is Piling Into Oil

Oil prices jumped to five-month highs this... More

Investor Signposts: Week Beginning Apr 15 2019

Reserve Bank and jobs data ahead of Easter... More

Gold Stocks Continue To Grind Higher

The gold miners' stocks are still marching,... More

Should Frydenberg's Budget Be Aiming For Zero Net Debt?

It's a bit of a mystery how the government has... More



WHAT’S ON THIS WEEK

week 26 April 2019
    • 22
    • 23
    • 24
    • 25
    • 26

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search



Markets
Index: Points Change Percent

Featured Comment

Just as younger people (and older ones too ) look for Fairtrade coffee on supermarket shelves or prefer free-range eggs, so too do they seek investment funds.

Caring About The Planet Can Be A Good Investment

Broker buys

  • ASX Code
  • Company
  • Broker
  • RCLReadCloudPatersons
  • MYXMayne PharmaPatersons
  • HZRHazer GroupArgonaut
  • GRBGage RoadsArgonaut
  • IPHIPH LimitedCMC Markets
  • TPMTPG TelecomCMC Markets

Broker sells

  • ASX Code
  • Company
  • Broker
  • KGNKogan.comPatersons
  • APAAPA GroupPatersons
  • QANQantasArgonaut
  • WESWesfarmersArgonaut
  • SBMSt BarbaraCMC Markets
  • BSLBlueScope SteelCMC Markets

Central Banks Rates

  • RBA1.50%
  • FED0.50%
  • BOE0.25%
  • BOC0.50%
  • RBNZ2.00%
  • ECB0.00%
  • SNB-0.75%
  • BOJ-0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright TheBull.com.au. All rights reserved.