Here’s Why Giverny Capital Trimmed its Credit Acceptance Corp. (CACC) Stake

Giverny Capital, an asset management firm, published its fourth-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net return of 10.73% was delivered by the fund for the fourth quarter of 2021, slightly below its benchmark, the S&P 500 Index, which delivered an 11.03% gain for the same period. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.

Giverny Capital Asset Management, in its Q4 2021 investor letter, mentioned Credit Acceptance Corporation (NASDAQ: CACC) and discussed its stance on the firm. Credit Acceptance Corporation is a Southfield, Michigan-based auto finance company with a $7.7 billion market capitalization. CACC delivered a 2.85% return since the beginning of the year, while its 12-month returns are up by 124.94%. The stock closed at $531.30 per share on January 28, 2022.

Here is what Giverny Capital Asset Management has to say about Credit Acceptance Corporation in its Q4 2021 investor letter:

“I trimmed our holding in Credit Acceptance Corp., the subprime auto lender, which was up nearly 100% last year. CACC remains one of the most underappreciated companies we own: even after that huge run-up, it trades for 12x expected 2021 earnings per share and, for good measure, will earn about 46% on equity this year. Like Arista, it enjoyed a spike upward after a great earnings report in the fall, prompting us to take some profits when the stock rose above $660.

For those who aren’t familiar with it, Credit Acceptance is a lender of last resort for car buyers. A person with a default or three on his credit report may not be able to get a loan from a traditional source. But that person may also need a car to get to work. And holding down a job is the only way the person can improve his credit worthiness. CACC works mostly with “buy here, pay here” auto dealers, who sometimes cater to financially stressed customers. It enters into profit-sharing arrangements with dealers, to incentivize them to make loans that can be collected.

In the current environment, relatively few people are financially stressed. The government has provided enormous relief to consumers, the job market is strong, wages are rising. Plus, the value of used cars has risen so much that even when a customer can’t make loan payments, the lender can recoup most of the loan balance after a repossession. So, Credit Acceptance has historically high rates of repayment on its book of loans.

This is true for all lenders, but Credit Acceptance charges very high interest rates that incorporate the risk of substantial defaults into its return profile. As loans pay off at unexpectedly strong rates, Credit Acceptance earns a windfall. But because most customers are improving their credit scores and can get loans from banks and credit unions, Credit Acceptance finds itself harvesting a bountiful crop but not planting many seeds. We like this company and think it has a strong compliance focus and ethical grounding. The PE ratio is perpetually low because people conflate lending to bad credit risks, and sometimes being adversarial with those borrowers, as being a bad company. Ultimately, we sold some shares to manage the risk that Credit Acceptance won’t grow in the future the way it has in the past.”

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Our calculations show that Credit Acceptance Corporation (NASDAQ: CACC) failed to obtain a mark on our list of the 30 Most Popular Stocks Among Hedge Funds. CACC was in 25 hedge fund portfolios at the end of the third quarter of 2021, compared to 20 funds in the previous quarter. Credit Acceptance Corporation (NASDAQ: CACC) delivered a -9.89% return in the past 3 months.

In October 2021, we also shared another hedge fund’s views on CACC in another article. You can find other letters from hedge funds and prominent investors on our hedge fund investor letters 2021 Q4 page.

Disclosure: None. This article is originally published at Insider Monkey.