Barron's: Car Repos Exploding, Bad Omen

One new trade idea from this article and it is explained at the bottom of this post: $CRMT

Barron’s headline: Car Repos Are Exploding. That’s a Bad Omen.

By Lisa Beilfuss
July 8, 2022 6:00 pm ET…

The jobs report and minutes from the Federal Reserve’s June meeting were the economic highlights of the week, but they are, respectively, a lagging indicator and old news. This column instead digs into the auto market, where there is an underappreciated ticking time bomb.

Lucky Lopez is a car dealer who has been in the business for about 20 years. In recent meetings with bankers, where he bids on repossessed vehicles before they go to auction, he has noticed some common characteristics of the defaulted loans. Most of the loans on recently repossessed cars originated during 2020 and 2021, whereas origination dates are normally scattered because people fall on hard times at different times; loan-to-value ratios, or the amount financed relative to the value of the vehicle, are around 140%, versus a more normal 80%; and many of the loans were extended to buyers who had temporary pops in income during the pandemic. Those monthly incomes fell—sometimes by half—as pandemic stimulus programs stopped, and now they look even worse on an inflation-adjusted basis and as the prices of basics in particular are climbing.

My note: further down in this long piece are three more paragraphs which give me another hint that ptheland’s thesis that car parts companies are a place to seek alpha. Remember last week on this board we had the headline “Car Payments Which Look Like Mortgage Payments?”…

Add these three other paragraphs from this weekend’s Barron’s article that underline CNBC’s article above and think about former high flyers such as $TSLA $CVNA and $UPST. (Keep in mind this doesn’t even mention car insurers who are now forced to pay “total” damages for EVs made of one or two body pieces that only have a former quarter panel dent. “Right to Repair” is the new term - representing a growing movement - for people who want to repair cars themselves without voiding warranties.)

Banks’ auto lending standards, meanwhile, went out the window, and then lenders jumped on the bandwagon of overpaying for cars, Lopez says. “Everybody thought the free gravy train would never end,” Lopez says.

Now, he says he has never seen so many people making $2,500 a month owing $1,000 a month in car payments. That’s about double the maximum portion of income many financial advisors recommend allocating toward a car payment. “The idea that the economy is strong? Anyone who is actually doing business sees things are not strong,” says Lopez. “We had a housing bubble in 2008, and now we have an auto bubble.”

Consider data from car-shopping app CoPilot, which monitors daily online inventory across dealers nationwide to track what they say is the difference between a car’s listed price and what it would be worth if not for extraordinary pandemic dynamics. In June, used-car prices were up 43%, or $10,046 above projected “normal” levels, the company says.

Got a beater, jalopy, Scheissemobile from Outer Space? Buy auto parts at $GPO $AZO $ORLY etc. Keep that sucker running if you don’t want a mortgage payment instead of a car payment. Also this Barron’s piece gives us a name I’ve never heard of which sounds like it is in a sweet spot at this moment . . .

As Danielle DiMartino Booth, CEO of Quill Intelligence puts it, companies in the business of repossessing autos are among the first to know when economic trouble is brewing. And now those companies are buying car lots to handle the flood of repossessed, used cars coming to the market because what they are seeing is a longer and harder recession, she says. Lopez says banks are in turn leasing more land to handle an expected car-repossession surge.

Some auto executives have hinted of turbulence. Earlier this year, Vickie Judy, CFO of America’s Car-Mart (ticker: CRMT), discussed rising car repossession rates on an earnings call. In June, Ford (F) CFO John Lawler said the company had started to see delinquencies increase.

Like last week’s pick $LQDT, this week’s pick, $CRMT daily chart is trading inside a triangle and is already trading inside a bullish crossover of the 20 x 50 EMAs. Look at that P/E of 7.20.

This is a company which is going to have loads of new inventory coming online soon - and at cheaper prices and larger margins after auction sales.

$CRMT daily chart

$CRMT weekly chart is the one I will focus on if I enter a trade here. A breakout close above that top down trendline is a “GO” signal to start nibbling, possibly with a whole 1/3 position:

$CRMT monthly chart shows this stock is a 5x winner since 2016 when it recently traded to a $19.49 low.

Getting back to this long piece from Barron’s here is one more red flag flying factoid:

What is bubbling in the auto market reflects broader economic problems. The question: How might a bursting of an auto bubble affect the broader U.S. economy? Data published in May by the New York Fed shows Americans’ auto debt rose $87 billion for the year ended in March, to $1.47 trillion. That represents about a 10th of total consumer debt, which rose 8.2% over the same period.

So yeah, I believe car repos will skyrocket and there will be a resurgence in made for TV “Car Repo Man” reality shows.

$CRMT - on my watchlist radar.

p.s. Lisa Beilfuss is now someone I will follow. This was a great long look at car pricing, loans, lending scores, four-digit car payments which look like mortgages, and repossessions: