FirstCash's Recent Sell-Off May Be a Golden Buying Opportunity
Highlights:
This nationwide pawn shop operator has provided double-digit returns for decades — yet the stock has sold off more than 20% over a couple of months.
Investors sold shares after a first quarter report that looks fine on its face; a June sell-off seems sparked by an overreaction to a pair of external catalysts.
At under 17x earnings, valuation is more than reasonable, with macroeconomic factors now turning in the company’s favor.
At this price, there’s a clear path for the stock to return to double-digit gains.
If there’s one problem with the bull case for FirstCash Holdings FCFS 0.00%↑, it’s that it seems a little too easy. The operator of pawn shops in the U.S. and Mexico has been an excellent stock over time, returning more than 12% annualized since its 1991 initial public offering. Management is long-tenured and solid: chief executive officer Rick Wessel has been with the company for more than three decades, and CEO since 2006. The chief financial officer has been in his seat for more than 20 years.
Gains in the stock have slowed under Wessel, but FCFS has still returned 10% annualized, essentially matching the S&P 500 — no small feat for a presumably countercyclical business in a low interest rate environment. A look at rival EZCORP EZPW 0.00%↑ shows that strong performance was far from preordained:
source: Koyfin; chart since November 2006
Looking forward, meanwhile, the external environment seems to be strengthening. Higher interest rates are a benefit for FirstCash. So is normalized inflation, and the end of stimulus payments, both of which contribute to broader challenges facing lower-income consumers. Even the higher price of gold should provide a tailwind.
And yet FCFS has struggled:
source: Koyfin
FCFS has pulled back more than 20% since its first quarter release in late April, despite no real sign in the results of any long-term pressures on the business. And while there are two possible catalysts for the decline this month, both seem overblown, to put it mildly. This looks like a questionable short-term sell-off that is creating an intriguing long-term opportunity.