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Our Pawnshop Economy

Tuesday, 14 Oct 2008 | 7:28 PM ET

Cash-strapped consumers don’t have the same options struggling banks do. The Fed discount window doesn’t open for Joe Six-Pack. So when times get tough and credit is non-existent, a lot of Americans turn to a different window, at their local pawnshop, to raise money.

Cashing In
Going to the pawnshop, with Mad Money host Jim Cramer.

Sure, this one’s bulletproof and you have to scream at the clerk through tiny air holes to get his attention, but pawnshops do trade greenbacks for jewelry. And as morbid as it may sound, more and more people might be exchanging their favorite gold bracelet for cash as the U.S. economy continues its downward spiral.

That’s why Cramer likes Cash America . He’s not a big fan of what they do – pawn and payday lending as well as check cashing – but he has been recommending these trade-down plays in anticipation of a recession (think discount retailers like Wal-Mart). As consumers pull their belts tighter, these are the companies that do well.

Cash America is the largest pawnbroker in the country, with 480 shops in 22 states. It’s a business with high barriers to entry, thanks to heavy regulation, so competition shouldn’t threaten the company. And a recent purchase worth 80% of a Mexican pawn operator should boost earnings as soon as the deal closes in December.

There’s even a stealth play on gold here. At the end of the second quarter, 71% of Cash American’s inventory was jewelry. The company sells the jewelry of customers who can’t payback their loans, so Cash America should fetch some decent prices with gold up 25% from 2007 levels.

One note about the regulation, though, before we give you the play on CSH. Cash America is losing some revenue because new rules about payday lending are cutting into the company’s profits – as much 70% to 80% in Ohio alone. Luckily, Cash America got an extension to do business there past the Sept. 1 deadline, so that should help earnings. Plus, the company’s finding ways around the rules by offering alternative lending products and online cash-advance services.

Cash America reports its third quarter next week, Oct. 23, and is expected to earn 65 cents a share. Cramer recommended putting only a quarter of a position on CSH because the stock is already up $8 over the past two days. Wait for it to get knocked down a bit before buying more.






Jim’s charitable trust owns Wal-Mart.

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the Mad Money website? madcap@cnbc.com

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