Hedge funds, which are generally amoral regarding the practices of companies they invest in provided they generate a return, have started to sell off shares and short the stock of World Acceptance in part because of recent revelations about its predatory lending practices.
In the second quarter alone, 16 institutional investors closed out their position in World Acceptance, which provides installment loans, and 71 reduced their position. What’s more, some of the country’s most prominent hedge funds began dumping the stock this spring.
The exits and sell-offs among hedge funds dovetail with news of World Acceptance’s most egregious lending practices coming to light, such as targeting low-income populations, not being forthcoming about the optional nature of insurance for its loans, not fulling explaining the renewal process to customers, and charging more than 200% interest on some loans.
Activist investor Whitney Tilson has been one of the harshest critics of World Acceptance, calling it “bad for humanity.” Tilson publicly shorted the company and wrote a lengthy letter to investors on why World Acceptance will likely come crashing down, a fate Tilson believes it deserves given some of its predatory lending practices.
“When you look at the rate of interest, they’re charging people fees for lending for a week and lending to poor and desperate people, but you’re not lending to them against any assets, just making unsecured loans to a subset of subprime borrowers,” Tilson said in an interview. “They’re praying on the most vulnerable people in our society — the least financially sophisticated — and the paperwork is befuddling. It sucks these people in for very little amount of money and then gets them way over their head.”
World Acceptance’s CFO quietly retired earlier this month. Public records show she is 43 years old. A week later, senior vice president Francisco Sauza unloaded 2,000 shares of his stock in the company. And two of the four major analysts covering World Acceptance downgraded their ratings of the company from buy to hold.
Part of the reason for the downgrades seems to stem from World Acceptance’s multiple delays of its 10K filing, which contained a number of questionable revelations like misjudging the money needed to support its loan losses.
“Management’s assessment of the Company’s internal control over financial reporting identified a material weakness related to the documentation of the establishment and assumptions underlying the adequacy of the allowance for loan losses and the documentation of management’s assessment of renewals that may be considered loan modifications,” the company wrote in its filing in June.
Still, despite all the negative attention, World Acceptance’s stock price has almost fully recovered after plummeting from a high of more than $94 in the aftermath of the revelations. It now trades at just under $90. Perhaps that’s why not every hedge fund has bailed on the company. Indeed, 21 investors created new positions and 43 added to an existing position in the second quarter.
World Acceptance did not return a phone call seeking comment.