Through its automobile dealer partners, Credit Acceptance (NASDAQ:CACC) Corp. provides financing for vehicle purchases to consumers, regardless of their credit history. The last piece of information in this sentence is key here, because it means that the company serves those people, who couldn’t get a loan from a traditional bank. These are the kind of customers, who are usually the most financially vulnerable when the economy takes a tumble, also known as subprime borrowers.
Credit Acceptance makes a lot of money while the economy is strong, but its target customer has been struggling lately, to say the least. The default rates on subprime auto loans have now reached heights not seen since 1996. In other words, people increasingly can’t pay back the money. This is a problem for companies such as CACC, which service the loans and expect to collect the interest.
Investors seem oblivious, though, as the stock price is up 40% in less than six months. Ignorance is unlikely to remain bliss for long, however. As is often the case, a bearish Elliott Wave setup has been forming precisely when the company’s fundamentals have been deteriorating under the surface.
Credit Acceptance is not that far below its 2021 all-time high, but the patterns it has drawn since then are troubling. The decline from $703 to $358 can be seen as a leading diagonal, labeled 1-2-3-4-5 in wave (A). It was followed by a simple A-B-C zigzag correction in (B), whose wave B was an expanding flat. This pattern alone should give investors a pause.
Supported by the rapid deterioration in the subprime auto loan category, it is a strong reason to avoid CACC. If this count is correct, the stock is ripe for a notable decline, since wave (C)’s natural targets lie near the $300 a share mark. From the current level of $532, that’ll be a selloff of more than 40%.
Unfortunately, there is more. In addition to the worsening fundamentals and bearish Elliott Wave setup, Credit Acceptance is facing a legal threat, as well. On January 4, 2023, the Office of the New York State Attorney General and the Bureau filed a complaint, accusing the company of engaging in deceptive practices, fraud, illegality, and securities fraud. CACC “intends to vigorously defend itself in this matter.”
We’re no lawyers and everyone is innocent until proven guilty, but this definitely doesn’t sound good to us. It adds a serious legal dimension to Credit Acceptance risk profile, making the stock even less attractive. Investors, who continue to ignore all the red flags, are doing so at their own peril.