Over the past few years, the Zacks Consumer Loans industry has been bearing the brunt of muted consumer sentiments and weakening asset quality, mainly attributable to relatively higher rates and a challenging macroeconomic backdrop.
However, the Federal Reserve’s aggressive start to monetary policy easing has given a breath of relief to the industry players who were reeling under high funding costs. The Fed has lowered the interest rates by 75 basis points (bps) since September 2024, and another 25-bps cut is expected to be announced in today’s Federal Open Market Committee (FOMC) meeting.
With improving consumer sentiments and loan demand, driven by lower interest rates, consumer loan providers are expected to perform better going forward. Additionally, the U.S. economy is likely to grow at a solid pace while the job market tightens. With these favorable factors, consumer loan stocks like Enova International ENVA, Mr. Cooper Group COOP and Capital One Financial COF make an attractive pick for investors looking to generate robust returns.
The consumer loan industry has widely outperformed the S&P 500 Index and the Finance sector so far this year. The stocks in this industry have collectively gained 39.6%, while the Zacks S&P 500 composite and Finance sector have gained 29.6% and 22.5%, respectively.
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Though the Fed is about to make a final rate cut for 2024 in today’s meeting, market participants are concerned about the interest rate trajectory in 2025. The September FOMC meeting dot plot revealed a consensus among Fed officials for four reductions in 2025. However, sticky inflation has put a question mark on this, and now two to three rate cuts are expected.
Yet, with rates decreasing, demand for consumer loans is expected to rise. This, coupled with improving consumer sentiments, will support consumer loan providers. However, weak asset quality is a near-term concern.
3 Consumer Loan Stocks to Bet On
Investors can consider the above-mentioned consumer loan stocks with solid fundamentals and strong growth projections to generate healthy returns in 2025.
To choose these consumer loan providers, we ran the Zacks Stocks Screener to identify stocks with an expected 2025 earnings growth rate of more than 10% and year-to-date price performance above 40%. Also, these stocks currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy).
Enova: Based in Chicago, IL, this leading financial technology company focuses on providing online financial services. The company currently provides services in the United States, the U.K., Canada, Australia and Brazil. ENVA caters to small businesses and capitalizes on its proprietary technology, analytics and customer service capabilities to underwrite and fund loans.
Being an early entrant into online lending, the company has completed almost 64 million customer transactions and collected nearly 65 terabytes of consumer behavior data since its launch in 2004. This has enabled Enova to better analyze its specific customer base.
Enova has been diversifying its operations. Some of ENVA’s financing products and services are installment loans, line of credit accounts, and receivables purchase agreements. Also, the company has undertaken acquisitions to bolster market share.
Yet, ENVA’s credit performance remained under pressure, with higher consolidated net charge-off and delinquency ratios in the first nine months of 2024.
The Zacks Consensus Estimate for the company’s earnings for 2025 is pegged at $10.81, indicating a rise of 22.1% from the year-ago reported figure.
ENVA shares have jumped 80.6% in the year-to-date period. It currently flaunts a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Cooper Group: Headquartered in Coppell, TX, the company is engaged in non-banking services for mortgage loans. It operates through its primary brands — Mr. Cooper and Xome.
Though the demand for mortgages has marginally improved as rates declined, solid growth is less likely to occur anytime soon. Nonetheless, COOP is well-placed to leverage its scale (it is one of the largest non-bank mortgage servicers in the United States) and bolster its top-line growth. Further, the acquisitions of Flagstar Bank N.A.’s mortgage operations in November 2024, and Home Point Capital Inc. and Roosevelt Management Company, LLC in 2023 will boost the company’s servicing business.
As the demand for loans gradually rises and funding costs stabilize, the company’s net interest income (NII) and net interest margin are expected to witness improvement.
The Zacks Consensus Estimate for the company’s earnings for 2025 is pegged at $13.38 per share, indicating an increase of 31.7% from the year-ago reported figure.
COOP shares have gained 52.7% year to date. It currently carries a Zacks Rank #2.
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Capital One Financial: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending, as well as deposit origination.
Buyouts over the years have been driving Capital One's revenues. In February 2024, the company inked an agreement to acquire Discover Financial in an all-stock transaction of $35.3 billion, a move that is poised to reshape the landscape of the credit card industry, create a behemoth in the industry, and unlock substantial value for shareholders. In 2023, the company acquired Velocity Black, bolstering the delivery of exceptional consumer experiences attributable to its innovative technology. These, along with other buyouts, reflect Capital One’s revenue-diversifying efforts.
The company’s credit quality was under pressure in the first nine months of 2024 due to the tough macroeconomic outlook.
However, decent consumer loan demand amid relatively high rates will aid its NII growth. Solid credit card and online banking operations, and rising demand for card loans will aid financials.
The Zacks Consensus Estimate for the company’s earnings for 2025 is pegged at $15.53 per share, indicating an increase of 14.6% from the year-ago reported figure.
COF shares have risen 41.2% so far this year. The company currently carries a Zacks Rank #2.
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