The Inquiry started on 17 October 2018, and the hearing was on 12 December 2018 with a final report due on 22 Feb 2019.

Stocks that may be affected are: Afterpay (APT), Zip Co (Z1P), Credit Corp (CCP), Cash Converters (CCV), FlexiGroup (FXL), Money3 (MNY) 

To what extent are these companies affected?

In the past three months, most of these shares have been under pressure, with FlexiGroup the worst, down 27%, Money3 down 18%, Cash Converters down 13% and Afterpay down 12%.

Cash Converters, FlexiGroup and Money3 are most likely to be impacted through the Senate Inquiry, due to exposure to either payday lending, short-term loans or consumer leases. These companies also tend to be impacted by the economic cycle and a slowdown in housing would be expected to impact negatively on growth.

What about Zip Co?

Zipmoney is the company’s flagship product that offers interest-free credit for a minimum interest free period of three months. Revenues are generated through interest, merchant fees, establishment fees and late fees. ZipPay & Pocketbook are the other key products. Key is continued large merchant signings, such as Bunnings and Target at the end of last year. Interestingly, Westpac has 17% stake, while financing is through NAB and FIIG. Key risks are around the regulatory environment for some unsecured personal loans. Being consumer related, the company could be impacted by the economic cycle or any shocks to the economic outlook.

Understanding collection agencies, such as Credit Corp

Credit Corp is subject to economic cycles. During soft economic conditions, while there would be a bigger supply of PDLs and impaired loans, the flipside is that it would be harder to collect on the impaired debt. For example, during the GFC, Credit Corp had big falls in profit due to the difficulty in collecting on bought debt. Conversely, the relatively stable economic environment post GFC has been supportive for the debt collection business that Credit Corp runs.

My top pick

While there may be an opportunity to enter the stocks at low levels, there is downside risk from the findings of the Senate Inquiry result in February. Of higher risk are Cash Converters, FlexiGroup and Money3. For companies such as Zip Co and Afterpay, which are lower risk, both consumer spending as well as signing on new merchants are a key driver of growth. My top pick would be Afterpay due to the strong rates of growth from the US in the first six months of operations and the size of the retail market in the US.