Our Financials team led by Josh Steiner and Jonathan Casteleyn nailed the Short Call on Encore Capital Group (ECPG). Shares are down 12.5% amid speculation that the debt financing company will face increasing FTC scrutiny. They added ECPG to their Best Ideas Short list on 11/19/2014. Since then shares are down 19%.
In their ECPG Black Book, they cite “regulatory risk,” among others factors, as catalysts that could send the stock lower. See the slide from their Black Book below.
In September, the Consumer Financial Protection Bureau forced Encore to pay up to $42 million in consumer refunds, a $10 million penalty and stop collection on over $125 million worth of debts. In a press release the CFPB noted that Encore:
“… bought debts that were potentially inaccurate, lacking documentation, or unenforceable. Without verifying the debt, the companies collected payments by pressuring consumers with false statements and churning out lawsuits using robo-signed court documents.”
As today’s selloff clearly illustrates, investors think the regulatory woes are only going get worse before they get any better. In a press release, the FTC said it would be announcing “a major law enforcement initiative involving the debt collection industry.”