Starting off the year with one of the best setups I’ve seen in a while. As the market is dying, best place to put cash are companies that profit with rising rates. Here’s to hoping for another $79 buyout surprise.
OPFI (OppFi Inc.) is a fintech platform that works with banks to provide loans to consumers. Basically, it’s a very profitable subprime lender that went public in July and currently has a mini float due to share classifications (6mm). It is very profitable, and real-time data shows it is only going to get better. Will detail later.
There are 2 ‘plays’ here that are happening at the same time:
The board just initiated a $20m buyback (30% of current float) of its 6mm class A share float. Fantastic news, it shows the board is pro-shareholder. Shorts promptly became HTB and restricted on Friday.
Q4 earnings are expected mid-Feb and the street gave it a lower expectation than its blowout Q3 which makes zero sense. All data points to an exceptional Q4 with upgraded guidance.
6mm share float is becoming smaller per board buyback and intent.
25% short interest will become proportionately larger while the board makes the float reduction purchases. Board ruled out any dilution by explicitly telling us ‘stock too low’.
Total loans originating are increasing while the street expects lower Q4 earnings = zero sense.
Class A redeemables locked up till July.
Options still have a moderate OI and are still very profitable.
Short attempts at keeping stock below $5 to force institutions out is failing.
Bonus: if buyback-shares purchased are cash settled, brokers will forcibly close out shorts.
OPFI is a subprime lender – this means they loan money to people with bad credit. They make money via interest (Receivables) on loans and fees for signing contracts (Originations) and they lose money if clients default on those loans (Write Offs). Their Q3 showed a ridiculous 33% increase in originations and a 22% increase in receivables y/oy. This is a ridiculous amount of growth.
So, on Q3 ER, the stock surged to $8.4 but then got shorted to shit ever since. Why? Because even though on paper they were making money, 36% of their Q3 loans defaulted and short players think it’ll get worse or that people will stop initiating loans.
Shorts are wrong
All gov data shows loans are increasing substantially with the highest rate of change in the past year. In fact, even with a statistically higher default rate, OPFi charges so much (criminally so much) – average loan yield is 131% – that even if defaults were to increase dramatically, they would still make money.
Unlike the market at large, rising rates will not materially impact OPFI or other Fintech stocks. Meanwhile, savings have sunk to pre-pandemic lows. All data points to continued growth for lenders, and the cycle is early enough to prevent delinquencies and defaults.
Shorts have positioned themselves into a very difficult situation nearing all time highs while all actions by the management will only further increase share value. As hedge funds do not typically touch penny stocks (stocks under $5), my theory is that in addition to being bearish on the company financials, shorts were attempting to dump the share price below the almighty $5 for an extended period of time, but are presumably about to fail. Overleveraging at all time lows does not typically work well.
Share buyback authorization
“While our primary focus is to deploy capital to drive incremental growth and investment into the OppFi platform for product enhancements, new technology, and a superior consumer experience, this repurchase program is designed to provide the Company with an effective means to also support our stockholders when our share price becomes disconnected from what our Board believes to be our long-term value and future earnings potential,” – Todd Schwartz, Co-Founder of OppFi
Last Thursday, Jan 6, the board authorized a $20mil class A share buyback which is the equivalent of 30% of the float. The stock immediately went up 10% since this share buyback fundamentally means 3 things:
[Management] is reducing the float and are literally telling you stock is too low.
[Management] is telling you they literally don’t need the money since they’re kicking ass. This forecasts Q4 ER in February.
[Management] is telling you they will not dilute [read: sell] and in fact are doing the opposite.
Cue shorts shorting. But it only worked temporarily, and they’re likely adding fuel to the upside, exacerbated by a bomb Q4 ER.
Q4 Earnings Report
Estimated mid Feb. The street believes 2022 will have lower receivables and is pricing in the negative implications for the 2022-2023 year. OPFI generated record originations in 2021-2022 and I see zero reason why this will change, as exemplified by the FRED releases.
OPFI was trading at below book value at the end of Q3 while stock price has only fallen since. This doesn’t make sense to me and I believe Q4 ER will only showcase strong growth with its current 21% net profit margin.
Share structure and market cap
OPFI is divided into 2 major types of shares, Class A and Class V. The Class A float (the publicly trading shares) has appx.12mil shares, of which almost 5mil were taken out by Blackrock through a bunch of filings last Fall, leaving the float at 6mil.
This is the cool part. OPFI is a $570m company trading like a microcap because the vast majority of its valuation are in Class V shares (96.5mil shares) the founder and board head, Todd Schwartz, owns. This is the same Todd Schwartz that wrote the memo above that authorized the share buyback – this is him telling you his priority is a higher stock price [read: he is not selling and diluting the class A float].
Might be bumpy, but share price should go higher by virtue of a short squeeze, the buyback, and call OI filling out. I’ll be accumulating shares, Jan and Feb calls. There is no reason OPFI should be below it’s initial SPAC $10 merger price and ample reason for the $14 price target given by JMP.
Jan 5c, 7.5c
Feb 5c, 7.5c