One striking example: the pawn industry.
As the recovery stalls, pawn customers are expected to continue piling in with their gold jewelry, DVRs and other personal items to pledge or sell in exchange for cash.
Tighter lending policies by banks and a squeeze on subprime customers by credit card companies amplify the effect, forcing beleaguered consumers to pawnshops and other alternatives such as payday lenders.
"Then throw in high energy costs, high food costs and anything else that puts pressure on disposable income. That creates the need for more borrowing," said analyst David Burtzlaff of Stephens Inc.
The large, publicly traded pawn chains Cash America (NYSE:CSH - News), First Cash Financial (NASDAQ:FCFS - News) and EZCorp (NASDAQ:EZPW - News) are benefiting.
They also offer high-interest, short-term payday loans, although that's a shrinking part of their business.
Why? Not only do you need a paycheck to qualify, but states have been pressuring payday lenders with profit-wilting regulations.
That's not the case with pawn stores. And you don't need a job to get a loan. You just need stuff.
Borrowers hock their goods with a pawnbroker in return for cash. If they can pay back the loan, with interest, before the time agreement expires, they get their item back.
If not, the pawnshop sells the collateral. Pawnshops are seeing a wealth of sales, offering what First Cash Chief Executive Rick Wessel calls "deep value" pricing.
"In today's economy, customers are looking for a bargain," he said.
Same-store sales across First Cash's more than 200 shops in the U.S. jumped 15% in the first quarter vs. a year earlier, a high watermark, Wessel says.
"We were typically in the mid to high-single digits until a year or two ago," he said.
In Mexico, where First Cash and other major U.S. pawn operators are working to consolidate a competitive market, sales are growing even faster.
IBD's Finance-Consumer Loans group held firm among IBD's 20 strongest industries during the past quarter.
The largest company in the group, measured by market capitalization, is Capital One Financial (NYSE:COF - News). Originally a consolidator in the subprime lending arena, it is rapidly becoming a more diversified financial services firm.
Though Capital One is less active in subprime consumer loans than it used to be, "it's finding a unique opportunity in the upper end of that subprime universe," said John Stilmar, an analyst with SunTrust Robinson Humphrey.
"With their expertise (in nonprime lending), Capital One is able to go in and make that segment of the market work," Stilmar said.
1.Business
Rising gold prices lured many new operators into the pawn trade over the last couple of years. But the increasingly crowded field in both the U.S. and Mexico has also made the business more competitive, especially on pricing, says analyst Liz Pierce of Roth Capital Partners.
To stand out from the many local, gold-only pawn stores in Mexico, U.S. players are opening full-service sites stocked with TVs, furniture and appliances.
First Cash has been especially aggressive in opening full-service pawn stores in Mexico, where it's been active longer than other U.S. players and has the biggest presence, with over 400 stores.
"They've gone through their hard knocks already," Pierce said. "They have the personnel groomed for the second- and third-generation managers that will help them open stores quickly."
First Cash's annual sales per store in Mexico is about $660,000, with mature stores taking in $1 million a year, according to analyst Daniel Furtado of Jefferies & Co. With 44% of the firm's Mexican stores less than three years old, average per-store revenue should rise as those stores age.
"This should lead to earnings growth" even before taking into account new store openings, he wrote.
Cash America, the largest U.S. pawn operator with about 800 domestic stores, plans to open 20 new full-service stores in Mexico this year. That's a change from its jewelry-only format.
EZCorp's U.S. pawn same-store sales rose 11% in the second quarter while Mexican same-store sales jumped 23%.
• Name of the game: Pawn managers need to wear "multiple hats," Pierce says. "They have to be both a merchant and a banker," she said.
They must make quick decisions, she says. What are the odds a customer will come back to claim their personal items? How much will they lend on it? If customers default, what will they price the merchandise for retail sale? Do they even need the product?
"You can't take store managers at fast-food units and drop them in (to pawnshops) and think they are going to be effective from day one," she said.
2. Market
Popular cable shows "Pawn Stars" and "Hardcore Pawn" have glamorized the largely mom-and-pop pawn business. But large, publicly traded companies are in consolidation mode.
In the last quarter alone, EZCorp acquired five pawn stores in South Florida. It opened five new stores in four states and agreed to buy 15 Midwestern pawn stores from Mister Money.
Pawn stores cater to consumers in need of short-term cash. Analysts say that up to 50% of U.S. consumers don't have enough money to cover even a $2,000 emergency.
According to a 2009 survey by the FDIC, 7.7% of U.S. households, or 9 million, are unbanked. That is, they don't have a checking or savings account.
Another 17.9% of U.S. households, or about 21 million, might have a checking or savings account, but rely on alternative financial services such as check-cashing services, payday loans and pawnshops to make ends meet.
South of the border, 80% of Mexicans are unbanked or underbanked, says Pierce.
"In Mexico you don't have a banking system that people are confident in," she said.
CEO Wessel of First Cash said, "We're thriving in Mexico because the unbanked and underbanked population is larger than in the U.S., and that's our primary customer base."
Mexico is indeed the leading foreign destination for pawn operators. Besides its big pool of customers, it's convenient.
Most of the big pawn and payday lenders are based in Texas and have bilingual staffs that can facilitate expansion southward.
Cash America is pushing even further, tapping into a similarly underbanked population in Central or South America. It plans to open at least one storefront starting by year-end.
3. Climate
The banking industry is reacting to changes in the card act and Dodd-Frank bill by "limiting product offerings" to customers with borderline credit ratings, pushing them out of traditional free-checking, debit-card-based checking products, according to analyst Henry Coffey of Sterne Agee.
"Banks are throwing customers out left and right," he said. "So there are huge opportunities for small-dollar lending."
While payday loan operators are getting better-quality customers as banks tighten credit, bills in state legislatures keep coming up to crack down on the business.
Texas, where many companies are still active payday lenders, was a closely watched state this year. Though some licensing and disclosure laws passed, more restrictive bills failed.
Payday-loan critics argue that interest rates are exorbitant. Proponents say the rates are unseemly only if you annualize the numbers. In reality, payday loans average 14 to 17 days.
The new federal consumer financial protection agency is expected to focus on disclosure and business practices. Still ramping up and without an official director, it's "too busy in our view to take on the more complicated task of battling existing state laws and cannot regulate nonbank companies without a director," wrote Coffey.
Though they must abide by various state regulations, pawn stores generally have it easier, though local zoning laws often make it tough to open new stores.
That's one reason chains are buying existing stores in the U.S., or expanding to other countries. EZCorp recently upped its minority interest in Australia-based Cash Converters to a majority stake.
4. Technology
A lot of growth is coming from Internet lending, including payday lending outside the U.S., where regulations are not so tough or uncertain.
Cash America's e-commerce arm accounts for about a quarter of its operating income and includes brands in Canada, the U.K. and Australia. Dollar Financial (NASDAQ:DLLR - News) has a big Internet platform in the U.K.
Jefferies & Co. expects much of Cash America's 32% spike in its marketing budget, aimed at newly disenfranchised banking customers, to be targeted to the Internet.
"The beauty of the Internet model is that you don't have the capital expenditures of building out stores," said Burtzlaff.
Founders of group-buying site Groupon have launched an on-line pawnshop startup, Pawngo.
5. Outlook
Analysts polled by Thomson Reuters expect earnings at the major pawn and payday companies to rise in double-digits through at least 2012.
Some firms, such as First Cash, have raised this year's profit guidance in recent months.
• Upside: As the cost of living goes up and banks steer away from lending to risky customers, analyst Furtado expects the underbanked space to "remain strong for the foreseeable future."
• Risks: The regulatory environment, including actions by the new federal consumer protection agency, is still uncertain, especially for payday lenders.
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