Even in a bull market, the market lets a few good companies slip through the cracks. While most seasoned investors understand the potential of well-known companies such as Facebook Where You’re here, many less familiar stocks are under the noses of the general public, but the gains they accumulate when the market catches up could be greater.
You can sometimes find these stocks in places where key industries intersect. Therefore, investors looking for these “rough diamonds” before pulling higher should consider financial stocks such as OppFi (NYSE: OPFI) and Capital of Silvergate (NYSE: SI), companies that create new business opportunities through technology-based applications.
OppFi is filling a growing void for the roughly 60 million Americans who do not have access to traditional credit. It uses artificial intelligence (AI) to assess potential borrowers who are underserved or not served by the traditional credit system. Unlike the more familiar Holdings reached, which also uses AI to target borrowers excluded from the credit system, OppFi is focusing on the subprime market. The company has helped around 550,000 people find money through this system to cover unforeseen costs, such as car repairs or medical bills.
OppFi’s subprime loans carry an annual percentage rate (APR) of 160%, a seemingly odd level in a world of single-digit interest rates for home and auto loans. However, OppFi’s APR is lower than payday loans, which can be as high as 400%, according to the Federal Reserve in St. Louis. The company also offers transparency and does not charge any additional fees, such as overdraft fees or prepayment penalties.
In addition, the company is on a mission to help its clients achieve better credit and offers free financial literacy classes on its website. His approach won out Loan treethe customer satisfaction award for the three quarters in 2020.
In the first half of 2021, the company reported total revenue of $ 163 million. While this does not represent any significant change from the first six months of 2020, the change in the fair value of receivables fell to $ 34 million in the absence of widespread pandemic lockdowns. This helped net income of $ 129 million to rise 48%. In addition, despite an increase in total expenses of 33% during this period, net income increased by 133% to reach $ 42 million.
Despite this growth, the stock carries certain risks. Washington, DC, Attorney General Karl Racine sued OppFi in August over its high-interest loans because OppFi’s rate is higher than DC’s maximum interest rate of 24%. The company also faced an investigation related to military loans, although the Consumer Financial Protection Bureau decided not to press charges.
Still, a Federal Reserve study showed that consumer finance companies that offer cash loans would need to charge triple-digit interest rates on small loans to break even. This strengthens the business case for OppFi, as borrowers would likely not benefit from loans otherwise.
Analysts are forecasting consensus net earnings of $ 0.76 per share for 2021. At a share price of about $ 7.50 per share, that equates to about 10 times earnings for 2021. That not only dampens the risks to the business model, but also offers a low-cost transition to a potentially lucrative market.
Capital of Silvergate
Silvergate is not a household name for most Americans, but that could change soon. Despite holding a traditional banking charter, it has gained attention with its Silvergate exchange network, which facilitates instant cryptocurrency exchanges. It also offers lines of credit guaranteed by Bitcoin and provides secure storage for customers’ digital money.
It also acts as the sole issuer of Facebook’s stablecoins, helping to make Silvergate one of the leading cryptocurrency stocks. Stablecoins are digital coins indexed to government currencies. Facebook manages its stablecoins through the Diem Association, an organization created by Facebook to build its blockchain-based payment system.
In the second quarter of 2021, the number of Silvergate customers grew to 1,224, an increase of 39% over the previous 12-month period. Additionally, Silvergate reported $ 11.1 billion in cryptocurrency deposits, an increase of 640% from levels last year. By not having to pay interest on these deposits, the company has more capital on which it can make loans.
This advantage enabled its net profit to reach $ 33.6 million in the first half of 2021, an increase of 241% compared to the same period in 2020. The increase in interest income and a dramatic increase in Deposit-related fees were also responsible for the bulk of the revenue increase.
Investors have taken notice, pushing Silvergate stock up about 950% over the past 12 months at recent prices. The stock has recently risen more than 60% since September 20. Additionally, his price-to-earnings (P / E) ratio of nearly 75 may seem high given that his multiple remained in his teens for most of 2020.
Nonetheless, Silvergate’s market capitalization of just over $ 4 billion makes it still a relatively small company. Given its massive cryptocurrency-driven growth and the optimism surrounding cryptocurrencies, Silvergate’s rise to power may have barely started.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.