Merion Road Capital, an investment advisor, released its third-quarter 2022 investor letter. A copy of the same can be downloaded here. In the third quarter, Merion Road Small Cap Fund returned -11.5% compared to 2.1% return for the Russell 2000 Index, and its Long Only Large Cap returned -6.4% compared to -4.9% return for the S&P 500 Index. In addition, you can check the top 5 holdings of the fund to know its best picks in 2022.
Merion Road Capital discussed stocks like America’s Car-Mart, Inc. (NASDAQ:CRMT) in its Q3 2022 investor letter. Based in Rogers, Arkansas, America’s Car-Mart, Inc. (NASDAQ:CRMT) is an automotive retailer. On November 04, 2022, America’s Car-Mart, Inc. (NASDAQ:CRMT) stock closed at $66.00 per share. One-month return of America’s Car-Mart, Inc. (NASDAQ:CRMT) was 7.89% and its shares lost -37.09% of their value over the last 52 weeks. America’s Car-Mart, Inc. (NASDAQ:CRMT) has a market capitalization of $389.442 million.
Here is what Merion Road Capital specifically said about America’s Car-Mart, Inc. (NASDAQ:CRMT) in its Q3 2022 investor letter:
“During the quarter I initiated a position in America’s Car-Mart, Inc. (NASDAQ:CRMT). CRMT is a used auto retailer and financing company serving low-end consumers. Given their focus on rural areas with limited public transportation, CRMT offers an essential service – a way for poor credit quality customers to get to work. As you might expect, loan charge-offs have averaged 25% annually and typically occur when a customer loses their job or the car breaks down. To offset this risk, CRMT charges a hefty 16% annual rate.
You might wonder why I would buy this given the economic sensitivity of the low-end consumer and falling auto prices. Should unemployment pick-up we will likely see increasing loss incidence rates. And with falling auto prices it would be logical to assume that their upfront margins would compress and loss recovery rates would fall.
Over the past two decades CRMT loss reserves peaked two times to the 32-35% range. In both of these periods CRMT loss expenses exceeded actual charge-offs of 30-33% as the company had to increase their balance sheet reserves. The good news is that, today, balance sheet reserves are already at the high end of the range at 22.4%. Even considering those previous catch-ups, CRMT has been profitable in every year over this time frame. Of course, it is entirely possible that we enter another period of high charge-offs. But these are relatively short-term loans (42 months on average) where the majority of defaults occur within the first twelve months. Given the quick turnaround, CRMT has the opportunity to adjust its underwriting standards in real time. As of last quarter loan’s delinquent 30 days or more stood at 3.6%, slightly below the long-term average. Furthermore, in April of this year the company financed half of their loans via a non-recourse securitization. Not only does this diversify their funding sources, but it also helps ringfence some risks to the enterprise…” (Click here to read the full text)
America’s Car-Mart, Inc. (NASDAQ:CRMT) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 14 hedge fund portfolios held America’s Car-Mart, Inc. (NASDAQ:CRMT) at the end of the second quarter which was 15 in the previous quarter.
We discussed America’s Car-Mart, Inc. (NASDAQ:CRMT) in another article and shared the list of the best-used car stocks to buy. In addition, please check out our hedge fund investor letters Q3 2022 page for more investor letters from hedge funds and other leading investors.
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