Short WRLD 6


Disclosure: Short World Acceptance Corp (WRLD)

For round two of the FactSet/SumZero Top Idea contest, I wrote about WRLD. Since this is the first full-length short thesis I’m publishing on the blog, a bit of background from the FAQ:

Why does Cable Car short stocks?

Although short-selling is logistically difficult and increasingly competitive, it is an essential tool to reduce the impact of market downturns on a portfolio. During falling markets, many stocks will decline in price, even those of companies with strong business models. During these times, having capital available to reinvest in high-quality companies can provide an important source of return over the long term. Short positions that increase in value when other positions are declining provide incremental capital when it is needed most.

In normal times, short sales can also generate incremental return by capitalizing on mispricing that results from misunderstandings in the marketplace. Security selection involves recognizing asset prices that can decrease as well as those that can increase. Cable Car does not view short selling as a moral judgement. Although Cable Car sometimes shorts companies it suspects of fraud or malfeasance, short positions often reflect Cable Car’s view that the market’s expectations for an otherwise good business have gotten too high. The activity of short sellers is an important part of fully functioning capital markets.

Posted in: Individual investors

In general, I am reluctant to publicize most of my short positions. Although I’m a firm believer that short sellers play an important role in financial markets, they tend to attract unwanted attention. I’m not trying to demonize anyone in my report, and hopefully no one wants to demonize me. WRLD is a crowded position (there was even another write-up in the contest about it), so I don’t think I’ll be poster child for it. Not that I’d mind if it works out the way I anticipate!

This piece is written for other professional investors and discusses the technical factors and timing considerations that make me think WRLD is compelling today. As always, feedback and dissenting views are welcomed.


Click here to download the write-up.

By accessing the report, you acknowledge that the information contained therein is for information purposes only and should not be considered a recommendation to take any action with respect to any security.


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6 thoughts on “Short WRLD

  • Reply
    GlennC

    High free cash flow, growing earnings, and buying back shares. Management strikes me as the one of the best in its niche. Are you sure this is a short?

    • Reply
      Jacob Ma-Weaver Post author

      Hi Glenn. Have you read the report yet? Loaning money at very high interest rates does generate free cash flow, though well below net income once you account for required reinvestment in refinancing and new loan origination. If regulators shut them down that will be moot, and there is quite a bit of balance sheet and competitive risk as well.

      What gives you a high opinion of management?

      • Reply
        GlennC

        Yep I’ve read the report.
        1- Regulators will shut them down: I suppose that it could happen. I’m not an expert in this area. However, I assume that these guys will find a way around the new regulations. If regulators only shut down payday lenders and leave installment lenders alone, then that may be slightly bullish for WRLD.
        2- Competition: Their industry has always been competitive.
        3- Management: WRLD has very good returns on equity. Historical share price performance is better than EZPW and CSH.

        • Reply
          Jacob Ma-Weaver Post author

          Thanks for the thoughts, Glenn. This is not like a lot of other regulatory situations where there is an easy way to circumvent new rules. World’s business model is already illegal in over 30 states. If the federal government adopts similar standards they are done. More narrowly, if credit insurance or refinancing are restricted, the company’s profitability will be materially impaired. I would be very cautious about assessing a management team solely on the basis of historical reported ROE and share price performance, particularly given recent attrition. It is a product of leverage and may not be sustainable.