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Number Cruncher

Carfinco: Nothing flashy, but plenty of zip Add to ...

What we're looking for

Since it is finally Friday, we thought of keeping it simple and upbeat: A look at one outstanding financial stock, as chosen by a StarMine award-winning analyst.

What we found

We consulted Fred Westra, head of research and a financial services analyst at Industrial Alliance Securities Inc., ranked by StarMine this year as one of Canada's top stock pickers. The stocks he chose generated 17-per-cent more in returns than the comparable benchmark last year.

Mr. Westra said he likes to focus on small and micro-cap Canadian stocks. "Frequently, stocks that are in out-of-favour industries or have experienced a rocky history, in the case of turnarounds, provide an excellent hunting ground," he said.

His top pick is Carfinco Income Fund, which provides loans to people with poor or non-existent credit ratings to buy used vehicles. It sounds like a dangerous business, but Mr. Westra is impressed by Carfinco's risk-management process.

"Most importantly, they employ a device in each vehicle so that they can immobilize and locate cars instantly in cases where borrowers are five days in arrears," he said.

"Combined with robust appraisal, verification and collections processes, these elements allow CFN to boast delinquencies of just 2.9 per cent - better than prime credit cards."

Since Industrial Alliance started covering Carfinco in February, 2010, the stock has risen over 300 per cent and the dividend has increased 67 per cent, he said.

With a rebound in auto sales, particularly used cars, and credit scores likely to remain strained, "we think CFN has several years of runway to grow its portfolio, while facing virtually no competition currently," Mr. Westra said.

Its units are trading at 10.5 times its forward earnings per share, putting it in the middle of the pack between Canadian niche lenders and non-prime vehicle lenders.

"However, CFN has the highest return on equity in the sample group over last 12 months, is on track to grow at north of 20 per cent this year and next, and has amongst the highest dividend yield," Mr. Westra said.

CFN also has very high reserves to loans at 13.2 per cent, low leverage, and room to grow its dividend over time, he said. Its U.S. peers have historically traded at between 10-20 times earnings per share. Mr. Westra's $8.80 target is based on 14 times 2011 estimated earnings of 63 cents per share, providing a potential total return of 37.9 per cent.

Read more about the StarMine award winners and their picks: tgam.ca/starmine

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