Even in a bull market, the market lets a few good companies slip through the cracks. While most seasoned investors understand the potential of well-known businesses such as Facebook or Tesla, many less familiar stocks sit under the noses of the general public -- but the gains they rack up when the market does catch on could be more significant.
You can sometimes find these stocks in places where key industries intersect. Hence, investors looking for such "diamonds in the rough" before they shoot higher should consider financial stocks such as OppFi (OPFI -6.97%) and Silvergate Capital (SI -20.00%), companies that are creating new business opportunities through technology-based applications.
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OppFi
OppFi fills an increasingly large gap for the estimated 60 million Americans who lack access to traditional credit. It uses artificial intelligence (AI) to evaluate prospective borrowers either underserved or unserved by the traditional credit system. Unlike the more familiar Upstart Holdings, which also uses AI to target borrowers locked out of the credit system, OppFi focuses on the subprime market. The company has helped about 550,000 people find money through this system to cover unexpected costs, such as car repairs or medical expenses.
OppFi's subprime loans come with a 160% annual percentage rate (APR), a seemingly outlandish level in a world of single-digit interest rates for home and auto loans. However, OppFi's APR comes in lower than payday loans, which can run close to 400%, according to the St. Louis Federal Reserve. The company also offers transparency and does not charge added costs, such as overdraft fees or prepayment penalties.
Additionally, the company has established a mission of helping its customers build better credit, and it offers financial literacy courses on its website free of charge. Its approach won it LendingTree's customer-satisfaction award for three quarters in 2020.
In the first half of 2021, the company reported $163 million in total revenue. While that represents no significant change from the first six months of 2020, the change in the fair value of receivables fell to $34 million in the absence of widespread pandemic lockdowns. That helped net revenue of $129 million increase by 48%. Moreover, despite total expenses rising 33% over that time frame, net income rose 133% to $42 million.
Despite that growth, the stock comes with some risks. Washington, D.C., Attorney General Karl Racine sued OppFi in August over its high-interest loans, because OppFi's rate comes in higher than D.C.'s 24% maximum interest rate. The company has also faced a probe related to military lending, though the Consumer Financial Protection Bureau decided not to file charges.
Still, a Federal Reserve study showed that consumer finance companies that offer cash loans would need to charge triple-digit interest rates on smaller loans to break even. This bolsters the business case for OppFi, since borrowers would likely not receive loans otherwise.
Analysts forecast a consensus net income of $0.76 per share for 2021. At a share price of about $7.50 per share, that amounts to approximately 10 times 2021 earnings. This not only mitigates risks to the business model but also offers a low-cost segue into a potentially lucrative market.
Silvergate Capital
Silvergate is not a familiar name to most Americans, but that might change soon. Though it holds a traditional bank charter, it has attracted attention through its Silvergate Exchange Network, which facilitates instant cryptocurrency exchanges. It also offers lines of credit collateralized by Bitcoin and provides safe storage for customers' digital money.
It also acts as the sole issuer for Facebook's stablecoins, helping to make Silvergate a top cryptocurrency stock. Stablecoins are digital coins pegged to government currencies. Facebook runs its stablecoins through the Diem Association, an organization created by Facebook to build its blockchain-based payment system.
In the second quarter of 2021, Silvergate's customer count surged to 1,224, a 39% increase over the previous 12-month period. Also, Silvergate reported $11.1 billion in cryptocurrency deposits, a 640% increase from year-ago levels. Since it does not have to pay interest on these deposits, the company holds more capital from which it can make loans.
This advantage helped its net income rise to $33.6 million in the first half of 2021, a 241% increase from the same period in 2020. Increased interest income and a dramatic rise in deposit-related fees also drove most of the rise in income.
Investors have taken notice, taking Silvergate's stock higher by approximately 950% over the last 12 months at recent prices. The stock has spiked recently by more than 60% since Sept. 20. Moreover, its price-to-earnings (P/E) ratio of nearly 75 may appear elevated considering its multiple stayed in the teens for most of 2020.
Nonetheless, Silvergate's market cap of just over $4 billion makes it still a relatively small enterprise. Given its massive cryptocurrency-driven growth and the optimism surrounding cryptocurrencies, Silvergate's rise may have barely begun.
