Carfinco Financial Group (CFN-T)

Sold his holdings months ago when the deal first came out. (See Top Picks.)

About 6 weeks ago, a large Spanish bank decided to get into the Canadian subprime business in terms of auto lending and made a cash offer of about $11.25. This is very good news for the non-banks in general. The stock peaked in Jan/Dec at around $12 and fell to the $8 level. Doesn’t think there will be another bid coming. If you own, he would tender your shares.

There is increasing competition in the sub-prime auto lending area and they did an acquisition that is taking time to digest.

Has always admired the job the management did in building up a pretty good business. When investing in smaller cap Canadian stocks, you have to be a little patient because they get into these funks. There are so many momentum guys investing in the market now and they start to see a stock start to fall off, even if there are good fundamentals, they may start to sell. He is just starting to look at this one. There is more competition coming in to their segment of the market.

Has a small Short on this, but is neutral on it. On this pullback he would not recommend a Short. Had a hiccup in the business, but overall it is a good company. Not super cheap, and they won’t have any momentum going in their loan book right now. There is more competition on the low end of their market, and that is kind of hurting them right now.

Still likes this. Reasonably priced. Doesn’t think competition is a big issue. Stock has dropped because they did a financing, which effectively delevered them quite a bit. That affected their ROE, so now he is waiting for that capital to get soaked up. ROE seems to be troughing around the 20% level, which is where he wants it to stay. Expects this will start to lift as that capital gets employed. (See Top Picks.)

Doesn’t think there is anything wrong with this company, but, for the longest time, they were the only player in the D (?) space within auto lending. They now have another competitor, whereas in the past, there wasn’t as much attention paid to customer care and customer service. Because of this, a lot of dealers, when offered a 2^nd source, were very eager to do so. Still a lot of scope for both of them to grow their businesses.

The 1 year chart shows the uptrend broken in January. Not a great looking chart. If he owned, he would probably use the most recent rally as a way to get out.

Automotives’ seasonality is from Feb into April or May, but it pulled off substantially this year. Buy at last year’s low.

It is the shape of the Canadian consumer and how leveraged they already are. If Canada is at the end of its credit cycle then you want to get out of this. Would prefer a US regional bank for a credit cycle play.

On the last conference call mention that they were seeing some increased competition. They lend to a subprime market in terms of auto lending. Have always executed very well. He would wait and see what the next quarter looks like before stepping back in. They do a good job of executing in their market space. It is back on his radar screen.

Stock has dropped because quarterly results were a little bit disappointing. Also, management talked about competition in the space and it got investors’ attention.

Earnings are good, but the stock is kind of stalling out as if we are in a late cycle phenomena. Thinks you would see a good quarter out of them and things look good for next year. Would be very comfortable buying it here at around $11.

Starting to move into the states in a way that makes him comfortable. Good growth prospects in Canada for them. Stay the course and he thinks it will continue to do well. 4% yield. They are just starting to bite on assets in the States and work their way into the market.

One of his largest holdings. Lenders to the lowest segments of the auto borrowing population. In the D class and they dominate the D class. Install devices in the cars, so if a borrower is behind in payments, they’ll make your horn honk for 20 seconds. If you are 30 or 60 days behind, your ignition won’t start. If they have to repossess, they have a GPS system for this. Dividend is very sustainable and they have a lot of potential to increase their dividends.