TRADE INSTRUCTIONS
Date: June 19, 2017
Name: Credit Acceptance Corp.
Symbol: CACC (NasdaqGS)
Type: Open
Limit: Buy below $244

TRADE TARGETS
Holding Period: 3 months
Target Return: 12.7%
Annualized Return: 50.8%
Target Price: $275
Stop Loss Level: $215

COMPANY DESCRIPTION
Credit Acceptance Corporation, founded in 1972 and headquartered in Southfield, Michigan provides financing programs and related products and services to independent and franchised automobile dealers in the United States. It advances money to dealers in exchange for the right to service the underlying consumer loans; and buys the consumer loans from the dealers and keeps various amounts collected from the consumers. The company also engages in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company. Link to company website.

TRADE RATIONALE
While new car sales are on the decline, the used car market remains relatively strong. According to Edmunds, the total number of used cars sold decreased 1.3% during Q1 of his year compared to last year but the average transaction value increased by 2.1% to $19,200, resulting in slightly higher dollar sales volume (side note: $19k for a used car! Whatever happened to buying your kids an old jalopy for $700 that uses a metal clothes hanger for a radio antenna?).

That’s good news for CACC, which specializes in providing loans for used car buyers with “less than perfect credit.” Its most recent Shareholder Letter states that since it became a publicly traded company in 1992, CACC has grown GAAP net income at a CAGR (compound annual growth rate) of 20.1%. And it has done even better than that over the past fifteen years, using a proprietary credit scoring algorithm to minimize defaults that has resulted in a 25.1% CAGR in net income.

In many respects, CACC is the type of stock our Rapid Profits Matrix loves; it is a consistently profitable company in a mundane business with few competitors. Its average ROE (return on equity) over the past three years is 31.3%, yet it trades at a forward PE ratio of less than 12x earnings. That’s too cheap for a company with a 43% profit margin and growing its revenue by 17%. We’re not expecting fireworks out of this trade, but it could run up to $300 after reporting earnings in five weeks if it continues to perform at recent levels.

Note: Since CACC trades at a very high share price, consider using deep-in-the-money call options as an alternative to buying the stock.