• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Discretionary

Washington Driving These Stock Ideas

Auto-loan regulation could rattle some publicly traded auto dealers.
By CHARLES GABRIEL Nov 20, 2013 | 12:00 PM EST
Stocks quotes in this article: REGN, KMX, AN, GPI, SAH, ABG, PAG, LAD, GLDD, ORN

As the markets balk in the face of big round numbers (16,000 on the Dow, 1800 on the S&P 500, 4000 on the Nasdaq), and as Obamacare's troubled rollout has sucked the political oxygen out of Congress, Washington may nevertheless be a source for investment ideas. Three I'll mention here involve auto dealers, dredging companies and the drug manufacturer Regeneron (REGN).

Particularly interesting may be the auto dealers (CarMax (KMX), AutoNation (AN), Group 1 Automotive (GPI), Sonic Automotive (SAH), Asbury Automotive Group (ABG), Penske Automotive Group (PAG) and Lithia Motors (LAD)). These stocks have beaten the S&P for five years straight, but they have paused since September as sales data finally showed a decline and the 16-day government shutdown further slowed consumers in October.

Bulls still point to the 11-year high average age of vehicles on the road and to forecasts for continued solid sales growth in 2014. But bears growl that the Consumer Financial Protection Bureau has targeted as discriminatory the discretionary dealer markups on auto loans (within a 2.5% band above lender "buy rates").  What's likely to happen?

While the bureau is precluded by statute from jurisdiction over auto dealers, director Richard Cordray seems resolved to effect a "bank shot" by forcing a new dealer compensation scheme via legal action or regulation aimed at auto lenders, which are fair game. And despite pushback from dozens of House and Senate lawmakers, including members of the Congressional Black Caucus and some of the Hill's most vocal liberals, CFPB officials hosting an Auto Finance Forum last week still seemed determined to force action.

While not backing away amid the withering pushback against an earlier thrust of mandating a flat fee per transaction, Cordray now says the bureau may instead try to impose "a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise."

Either way, CFPB action to force a new dealer-lender relationship, and thus a dealer compensation paradigm, could obviously pose a threat to the dealers, given that such incentive "participations" or "reserve" payments have represented as much as a quarter of the industry's pretax profits.

Meanwhile, while it's not sure whether or when the bureau might begin a rulemaking process, legal experts are betting that the bureau will launch anti-discrimination, "disparate impact" cases upon a few large banks and indirect auto finance companies sometime next year. According to the law firm of Ballard Spahr, related settlements "will force the lenders to employ alternative dealer compensation systems to mitigate fair lending risk."

My point is not that Cordray and the CFPB will be unreasonable. On the contrary, one of the reasons that the former Ohio attorney general was finally able to overcome a GOP Senate filibuster to win formal confirmation in July is that he had earlier threaded the needle on the crucial "qualified mortgage" rule that will dictate U.S. home loan features for decades to come. With rare positive industry and bipartisan response on the "QM" as prologue, I'd expect the bureau to similarly steer a middle course on controversial auto loans -- albeit one that will still clearly affect what it sees as $25 billion in annual higher borrowing costs as a result of poorly disclosed dealer discretion in marking up rates.

So a day of reckoning seems inevitably coming, but possibly not for months and likely not in a way likely to wreck the industry, just ding it, and one that could even face a serious threat of bipartisan congressional rebuke. Thus a bet on the auto dealer stocks, long or short, may have to take into account multiple factors, ranging from the final come-to-Cordray and the Fed's timing for a tapering to an inevitable tapering (though still impressive) sales pace and the prospects for another government shutdown, which I'd happily say are slim.

Meanwhile, other notable stories, such as dredging companies (Great Lakes Dredge and Dock (GLDD) and Orion Marine (ORN)), might benefit from a water infrastructure bill that's now in House-Senate conference committee. That bill is likely to boost harbor maintenance funding by 25% when finally enacted in December or January. But there's a chance that the intense budget backdrop could push that uptick to fiscal 2015, which won't begin until next October, and that means delayed gratification.

Separately, passage of drug compounding legislation should help Regneron, because it would reduce encroachment on that company's macular degeneration drug Eylea. But here, Regeneron's shares are already up 50% this year, and it's not clear how much a positive the new bill's voluntary regulatory structure might be. So on this one, you may want to consult an expert.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Gabriel had no positions in stocks mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary | Politics

More from Consumer Discretionary

The Sagas of a Cruise Operator and a Burger Joint Continue

Jonathan Heller
Feb 24, 2021 10:00 AM EST

Carnival Corp. continues to sell debt and equity as it works to stay afloat, while Steak n Shake deals with problems of its own.

A Furniture Seller and Footwear Retailer With Room to Run

Bret Jensen
Feb 24, 2021 8:46 AM EST

Hooker Furniture and Foot Locker recently raised their dividends and could provide more upside to buyers of the shares in the months ahead.

DoorDash's Charts Tell Me to Stay Near the Exit Door

Bruce Kamich
Feb 22, 2021 8:55 AM EST

Buyers of DASH are not being aggressive.

Ruth's Hospitality Group Serves Up Medium-Rare Charts

Bruce Kamich
Feb 19, 2021 8:28 AM EST

The pace of the advance in the steakhouse operator's shares has been slowing and volume is shrinking, too, so be cautious.

Norwegian Cruise Lines? Get Off at the Nearest Port

Bruce Kamich
Feb 17, 2021 1:00 PM EST

The charts suggest that people will continue to be disappointed.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:51 AM EST REAL MONEY

    Watch Bob Lang and Doug Kass Discuss Short-Selling!

    Bob Lang and Doug Kass with an engaging and educat...
  • 11:32 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Navigating a Market Correction
  • 11:29 AM EST GARY BERMAN

    Where Does the Nasdaq Go From Here?

    Where does the Nasdaq Composite (CCMP) index go fr...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login