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Lending Club Is Ready To Beat The Market

Now that the hype of the IPO is over and the stock has dropped by 50%, is it time to look at Lending Club (NYSE:LC) as a growth investment?

Lending Club went public on the premise of being a peer-to-peer lender but that's not what it really is. Lending Club is a securitization platform for loans made through a bank.

The loans are made by the bank and then put into the platform for funding by small investors who usually take small pieces of each loan in order to spread the risk. There are two levels of middlemen between the peers. The bank and the platform. Lending Club and its competitor Prosper, which both use the same bank, are the pretty wrappers.

In theory, everybody is a winner. Borrowers get lower interest rates, investors get bigger returns, the bank gets an initiation fee, and Lending Club gets some initial fee and on-going servicing fees. Reports are that everyone is doing well with the exception of IPO investors.

Would we want to invest in this stock today is a trickier consideration. Lending Club is not currently a profitable company though they are on the cusp of profitability. The have only initiated $11 billion in loans to date. Against a $3.5 trillion consumer loan market this is barely a snowflake on top of the iceberg. There's plenty of room for Lending Club to grow their market share without having much effect on the competition.

There is no shortage of investors for the loans. Lending Club's biggest problem getting individual investors is the need to deal with restrictions on a state-by-state basis. They just recently added the states of Indiana, Nebraska and Kansas. There are now a total of 36 states that allow retail investors to participate in the program that gives them fairly consistent returns of 5% to 8%. Those 36 states represent 75%-plus of the US population.

Lending Club does not have to rely on individual investors. As providers of the technology platform, there is nothing that prevents them from investing money for institutions. Small and large pension funds alike would find returns of 5% to 8%...