Is LendingClub Stock Now A Good Investment?

- November 9, 2016


Over the last three months, LendingClub Corp (NYSE:LC) stock has been one of my favorite securities to trade. Back in September we identified a trend that produced a quick 20% return in LC stock. Afterwards, we maintained a rather small stake that still remains in the BNL Portfolio today.

However, after LendingClub’s most recent quarter, the question has quickly gone from whether LC stock is a good trade, to whether LendingClub stock is truly a good investment to own. In other words, if I increase the stake and make LendingClub stock a bigger part of the BNL Portfolio, will it be an asset or a liability?

What’s wrong with LC stock?

We most certainly believe it will be an asset. The reason lies in the fact that BNL Finance never considered its crime that led to market capitalization deterioration to be all that significant. Yes, falsifying a $22 million loan package is a shitty thing to do, but is it really meaningful for a company that had $8.3 billion in loan originations the year prior?

I don’t think the crime deserved the punishment, which was the destruction of shareholder confidence, DOJ and SEC investigations, and a slew of big banks halting loan purchases. Of all the problems that past management caused, it is the fallout with big banks that really sucks.

In the past six months, Goldman Sachs halted loan purchases and Citigroup denied a request from Jefferies to support LendingClub. Then, BancAlliance, a consortium of 200 smaller banks suspended its program to buy LendingClub loans. Keep in mind that before the scandal, banks were flocking to LendingClub because banks could capitalize on higher interest rates on relatively safe loans.

Why LendingClub stock is an asset

With that said, 75% of LendingClub’s business is still peer-to-peer and deals that exclude big banks. Therefore, it would not be the end of the world if banks stay away from LC. However, banks have more money to play with, so high participation means accelerated growth and a brighter future.

What LendingClub’s third quarter proves is that banks are starting to come around. Not only were originations slightly higher sequentially at $1.972 billion, but the National Bank of Canada approved an investment of $1.3 billion to buy LendingClub loans over the next year.

We believe that National Bank of Canada won’t be the last. LendingClub’s big business has been peer-to-peer, but there is real potential to enter bigger markets. LendingClub is doing just that by entering the car loan space, a market with $280 billion in originations last year. Given that LendingClub grew from $600 million in loan originations to over $8 billion in just three years, there is no question that LendingClub’s business model is where growth exists for banks.

Therefore, we believe that big banks will come back to LendingClub, and its third quarter showed proof. At $5.50/share, after losing half of its value in 2016, we believe that LC stock will be significantly higher this time next year.

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