The Motley Fool

Is now the time to snap up these 2 unloved stocks?

FTSE 250 guarantor loans lender Amigo Holdings (LSE: AMGO) is short of friends on the stock market today with the stock down almost 5% after reporting slower profit and revenue growth for the third quarter.

Bad credit

However, there were positive numbers too, with revenue up 34% to £201m over the nine months to 31 December, while adjusted profit after tax of £72m was up 37% on the previous year.

It also signed up a further 10,000 customers, while its net loan book grew 15% to £695.7m. Amigo, which floated in London last June, also made its first loans to customers in Ireland this month. Arrears don’t seem to be a problem, with 95% of its loan book either fully up to date or within 31 days overdue.

Brexit bothers

Amigo provides guarantor loans to borrowers who are unable to borrow from traditional lenders due to poor credit histories, offering borrowers with poor credit backgrounds a potential lifeline. It’s a simple business offering a single transparent mid-cost product, a guarantor backed loan at 49.9% APR with no additional charges or fees

CEO Glenn Crawford hailed another strong set of results, “delivering further growth in our customer numbers, loan book and revenue, whilst continuing to carefully manage our impairment levels”. It recently secured lower funding lines and remains confident of delivering full-year objectives, despite Brexit uncertainties.

Sub-prime investment

Investors aren’t so impressed and the stock trades at just 9.6 times forecast earnings with a PEG of 0.6. On the plus side it does offer a forecast yield of 4.1%, generously covered 2.6 times. Operating margins are an impressive 48.1%, while earnings are forecast to grow by 17% and 23% over the next couple of years. These are promising numbers especially if it can continue to keep a list of impairments, even if we do get some Brexit bumpiness.

The non-standard loans sector can be a rough business to be in, just ask investors in doorstep lender Provident Financial (LSE: PFG). By definition, businesses are lending money to people who are more likely to default than mainstream borrowers, although this also gives them the opportunity to charge dramatically higher interest rates which should more than cover the risk. Provident also sells high-interest Vanquis credit cards, payday loans and car finance through its Moneybarn brand.

Low expectations

The group has lost three-quarters of its value over the last three years following a string of profit warnings, as well as the shock departure of its chief executive Peter Crook and a scrapped dividend. In 2017, the Bradford-based group alerted investors to losses of between £80m and £120m in its home credit business this year after it changed the way it collected loans. Other issues included a £169m compensation bill and a £2m fine for mis-selling financial products.

It has continued to give investors a bumpy ride this year, plunging 20% in mid-January after warning that earnings would be at the low end of expectations.

Takeover question

Non-traditional lenders also have to cope with stiffer regulation, which saw off Wonga last year, after the Financial Conduct Authority imposed a cap on payday loan repayments.

Fund manager Neil Woodford, who owns 25% of Provident’s stock, is backing a surprise £1.3bn takeover by Non-Standard Finance but Roland Head says don’t buy into it. You might be tempted by the group’s forecast valuation of 11.4 times earnings, 5.5% yield and major turnaround potential. I’m not, though.

Getting Rich Slowly

It's easy to make a million by using a simple strategy such as tracking the FTSE 100 and letting your money work for you. Unfortunately, most investors 'over-trade' and, as a result, their returns suffer significantly...

To help you avoid this key mistake, the Motley Fool has put together this free report entitled "The Worst Mistakes Investors Make". These mistakes can cost you thousands over your investing career but the best part is, this report is free to download.

Click here to get your copy today.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.