Today, a CNBC report indicated that investors poured into the market earlier because they believed that the worst of the selloff was over. I hate to state this, but market momentum is negative. We have lacked consistent institutional buying in the market. Rallies have lasted just a few hours, and it’s the algorithms that are driving any short-term spurts.
Don’t be fooled by a tiny rally, especially when one headline can drive panic or euphoria. With Quadruple Witching set for next Friday and a lack of consistent institutional buying, I don’t think the bottom is in just yet. But I am interested in finding individual stocks that might have formed a bottom.
As I’ve long explained, executive insider buying of company stock is a sign that the asset might have reached a reasonable entry point. Who knows the balance sheet better than the CEO or the CFO of a company. The answer is no one.
Each day, I scan a variety of sites to determine the best buying opportunities based on insider purchasing. Today, I found a $1.08 million purchase by a CEO that really caught my attention. This company could succeed the longer that energy prices remain high and customer discretionary spending remains tight.
Backing Up the Lease
On March 1, 2022, Rent-A-Center (RCII) CEO Mitchell Fadel purchased 40,000 shares of company stock. The buying came after the company experienced a more than 42% decline in its share price. Given the current state of the economy, customer debt, inflation, and tight consumer spending could easily benefit the company.
If you’re new to Rent-A-Center, it’s an interesting business model. Roughly 35% of Americans have subprime credit scores. And up to 45 million Americans lack a credit score altogether. At a time that inflation is soaring, more Americans are turning to credit. The cost of oil, gas, food, and basic necessities continue to surge.
But what happens if people lack credit to purchase new furniture, new electronics, and more? That’s where Rent-A-Center enters the equation. The Texas-based company operates in the lease-to-own space of durable goods. It operates more than 2,400 storefronts around the United States, Mexico, and Puerto Rico.
It carries products from major electronics companies like Samsung, Ashley Furniture, Whirlpool, and Maytag. With “lease purchasing” or rent-to-own terms, a customer makes a number of payments. Once they have completed all of the payments, ownership transfers from the company to the leasee.
A customer doesn’t have to make every payment. They can return the merchandise at any time. These lease agreements offer a valuable service to millions of underbanked individuals who lack available credit to make large purchases.
Rent-A-Center Sees a Big Pullback and Upside
The company experienced a sharp downturn from highs in August 2011. That peak coincided with the end of stimulus programs from the Biden Administration. Shares pulled back by as much as 66% since last summer.
As the shares pulled back, I’ve been waiting for a bottom. This was a very successful company in the two years prior to the March 2020 crash. While the company benefited greatly from a number of stimulus packages and loose credit during the Covid-19 crisis.
In fact, in 2020 and 2021, RCII was one of my favorite stocks to sell cash secured puts on because it had such a strong balance sheet and low probability of a negative credit event. Now, with interest rates set to rise, the cost of goods moving higher, and the CEO buying shares with his personal cash (a direct buy according to the SEC Form 4 document), Rent-A-Center is an interesting play.
Analysts have been increasingly bullish on the stock. We’ve seen three Buy recommendations in the last two weeks with an average price target of about $44.00 That figure represents a potential upside of nearly 55% from Tuesday’s closing price.
I’ll circle back tomorrow to discuss other value plays outside of the energy and materials market. Momentum remains very negative right now, and it’s important to use tools like Insider Buying/Selling to help build trade conviction.