Auto Loan Balances, Interest Rates, Subprime Delinquencies, Cash Buyers, Tight Credit: How Are Our Consumers Holding Up?
Subprime credit in the auto lending industry has tightened significantly, with subprime lending and financing becoming more difficult to obtain. As a result, more buyers are opting to pay cash for their auto purchases instead of taking on high-interest loans. The balance of auto loans and leases has increased, driven largely by financing of new vehicles, but the percentage of cash buyers has risen significantly for both new and used vehicles. About 20% of new-vehicle buyers and 61% of used-vehicle buyers paid cash for their purchases in Q2, up from 16.5% and 58.5% respectively the previous year. This shift to cash buyers has led to a decrease in the overall debt burden associated with auto loans. Subprime borrowers are experiencing higher delinquency rates, while prime borrowers have stable and low delinquency rates. The tightening of subprime lending is part of a larger subprime cycle influenced by increased losses and more prudent underwriting.
JEPQ Continues To Deliver Outsized Returns
The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) has emerged as a top performer in its class this year, outperforming other covered call funds, including JPMorgan's own JPMorgan Equity Premium Income ETF (JEPI). JEPQ holds big tech stocks such as Microsoft, Apple, Amazon, and Nvidia, which have been outperforming the overall market for more than a decade. Unlike JEPI, which mainly holds low-beta stocks, JEPQ is not concerned with stock volatility and focuses on holding profitable tech companies with strong margins and solid cash flows. JEPQ is actively managed and sells options about 2% out of the money, generating additional upside compared to selling options at the money. The fund adjusts its position on a weekly basis and rolls many of its option contracts, giving it an edge in managing market conditions. JEPQ's dividend yield has remained relatively stable compared to other covered call funds, thanks to the higher volatility of tech stocks, which translates into higher yields when selling covered calls. Despite its success, investors should be cautious as JEPQ heavily relies on FAANG+ stocks, which have become expensive by historical standards.
Illumina: An Overvalued Fading Monopoly With Many Distractions
Illumina, the global leader in DNA sequencing, is facing increasing competition that could jeopardize its long-held status as a quasi-monopoly. The company has enjoyed high margins and generous valuation multiples due to its dominance in the market, capturing 70% of the total sequencing market and 90% of all genomics data. However, rising competition, particularly from Chinese firm MGI Tech in the short-read sequencing segment and PacBio in the long-read sequencing segment, is putting pressure on Illumina's margins and growth pace. Additionally, the company is dealing with governance turmoil and the need to divest its investment in GRAIL due to competition regulations. These factors are distracting Illumina from its core business activities and plans. While Illumina has strategic advantages in terms of geopolitics and its reputation, the concerns and distractions it faces lead to a recommendation to SELL, as the current valuation is considered too generous. A fair value per share is estimated to be around $85, representing an overvaluation of approximately 23% from the current price.
Mama's Creations: The Company Passed Extremely Conservative Estimates
Mama's Creations (NASDAQ: MAMA), a company specializing in deli meals, has seen its stock rise over 200% in the past year. Despite this significant rally, the company's financials suggest that it is still worth considering as an investment. With conservative assumptions for future growth, MAMA could potentially double in value over the next few years. The company's operations are focused in the US, with its products sold through various channels including QVC, owned by Qurate Retail. Mama's Creations has a decent financial position, with $5.5 million in cash and equivalents and around $7 million in long-term debt. The company's interest coverage ratio is also strong at around 12x, indicating that it can easily cover its interest expenses. In terms of profitability, Mama's Creations has shown improvement, with its ROA, ROE, and ROTC on an upward trend. The company has also achieved significant revenue growth, although analysts' estimates for future growth are more conservative. Despite some margin deterioration in recent years, gross margins have returned to the company's long-term goal of over 30%. Overall, Mama's Creations appears to be a strong and growing company, making it a potential investment opportunity.
Cooper-Standard Holdings: Solid Quarterly Results And Technical Chart
Cooper-Standard Holdings, a manufacturer of sealing, fluid transfer, and brake delivery systems, recently announced solid Q3 FY23 results. The company posted a profitable quarter for the first time since 2021, thanks to cost-cutting and lean-saving initiatives. Sales for Q3 FY23 rose by 12%, driven by favorable volume and mix in Europe, North and South America. Adjusted EBITDA increased significantly, and net income went from a loss to a profit. The management has raised its sales guidance for FY23, indicating a strong recovery from the impact of COVID-19. Factors such as improved supply chain, increased auto production, and the rising electric vehicle market are expected to boost the company's sales in the coming quarters. However, high interest rates in Europe may impact demand in that region. From a technical standpoint, the stock price chart of Cooper-Standard Holdings is showing signs of a turnaround, with a breakout and formation of higher lows. The stock appears attractive in both the long-term and short-term, with potential upside of 40% from the current level. Valuation-wise, the company's ratios indicate favorable value compared to the sector median. However, investors should be cautious of the company's increased debt levels and the risk of struggling with profitability. Overall, the company's recent profitability, positive technical chart, and favorable valuation suggest a buy rating.