EZCORP Inc (NASDAQ:EZPW), a Texas-based provider of pawn loans in the United States and Mexico and consumer loans in Mexico, is among the top positions of Laughing Water Capital. The hedge fund, led by Matthew Sweeney, recently released its Q3 investor letter (you can download a copy here), giving its analysis on EZCORP as well as some other companies. EZCORP is also a popular stock among hedge funds tracked by Insider Monkey. There are 20 funds in our database with bullish positions in the company.
Let’s take a look at Laughing Water Capital’s investment thesis on EZCORP:
EZCorp has moved past the stock price weakness caused by the convertible bond offering which I detailed in our 1H’17 letter. More importantly, the company recently announced a major acquisition in the form of 112 Latin American stores. While operationally this appears to be a good use of cash, there are larger implications which I believe will play out in the months and years to come as the market digests the news. First, for the last few years the narrative surrounding EZPW has been somewhere between “it is a disaster” and “they have a lot of changes to make.” As the company enters the final year of their 3 year plan with a cleaned up balance sheet and incredible operational improvements, the narrative should shift to, “they are back on a growth track,” which should lead to increased interest from the investment community.
Secondly, for the last few years while EZPW struggled, their largest competitor, FirstCash (FCFS) has been hoovering up large pawn operations throughout the western hemisphere without any competition. Now that EZPW has signaled they are back in the game, I believe it is likely that FCFS will realize that their best move would be to buy EZPW, even if it required a large premium. First, FCFS would be able to realize massive synergies by eliminating virtually all of EZPW’s infrastructure. Second, if they do not buy EZPW, FCFS will be living in a world where all of their substantial growth ambitions will lead them to competitive bidding processes, driving up prices.
Simply stated, paying up for EZPW means they will be able to pay down for every other pawn group.
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Boasting a market cap of around $532 million, EZCORP Inc (NASDAQ:EZPW) is engaged in providing pawn loans as well as selling merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers. The company now has more than 870 pawn stores, including 513 in the U.S. and over 350 in Latin America.
For its third quarter ended June 30, 2017, EZPW reported an 8% increase in total revenue to $183.6 million. Its net revenue rose 5% to $105.6 million mainly due to a 5% increase in pawn service charge revenue and a 4% increase in merchandise sales. Operations expenses jumped 1% to $74.2 million due to investment in customer facing labor and higher benefit claims. The company posted a profit of $5.53 million, or $0.10 per share, compared to $2.90 million, or $0.05 per share, in the last year’s same quarter.
Last month, EZCORP Inc (NASDAQ:EZPW) completed the acquisitions of GuatePrenda – MaxiEfectivo to boost its presence in Latin America. GuatePrenda – MaxiEfectivo owns and operates 112 pawn stores located in Guatemala, El Salvador, Honduras and Peru. The purchase price was over $53 million in cash.
Meanwhile, shares of EZCORP Inc (NASDAQ:EZPW) are down over 7% this year. The stock has moved just over 3% up during the last 12 months. On Friday, EZPW closed down 1% to $9.90. The consensus average target price on the stock is $11.00, while the consensus average recommendation is ‘Overweight’.
The writing was kind of on the wall at the end of March. S&P 500 Index was near the 4600 level whereas inflation rate was close to 8% and the 10-year Treasury yield jumped to 2.7%. The probability of further increases in interest rates and sharp declines in the stock market was much larger than the probability of further gains in stock prices. So, we started telling our premium subscribers to short the market at the end of March. Most hedge funds interpreted the macro developments the same way we did and reduced their exposure. The total value of stock holdings in hedge funds’ portfolios went down from $3.1 trillion at the end of December to $2.8 trillion at the end of March.
This isn’t a terribly large reduction in market exposure, but it is still a reduction. It still shows that hedge funds have a slight edge in market timing.
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For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
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