Last week, I visited a dozen pawnshops in Texas. I pretended to be a customer. I looked at a few watches and even bought some DVDs.

Texas legislation allows pawnshops to charge 240% annual interest on loans. There are also many illegal immigrants here who don't have bank accounts. In the industry, they call them "the unbanked." This is why Texas has more pawnshops than any other state in the nation...

In general, I found the pawnshops I visited had a steady flow of business, with several attendants behind the counters and half a dozen customers at a time.

Dallas is a wasteland of retail malls and freeways. Everything is neat and tidy... and totally lacking in charm. Compared to the other businesses around here, the pawnshops definitely had the best vibe. Loud music welcomed people in from the street. They were clean, well lit, and not the dingy establishments I had expected.
 
I got my best insight from the parking lots. When I'd finished looking around inside the stores, I'd time my exit to follow a customer out. Then I'd ask them what they pawned. At first, I was scared to pry. I need not have been. The five people I approached were all happy to tell me their stories...

I met Bart. He pawned a bag of tools for $65. I met Chester. He pawned a cell phone and a TomTom device for $40. A woman and her daughter redeemed a ring. The interest rate is 20% per month. If Bart doesn't bring $91 back to the pawnshop in two months, he loses his tools.

I asked Bart why he needed the money so badly. "Gas money to get to work," he said, as he unlocked a Ford F-150 pickup truck...

The pawnshop business does well when gas prices are high. Two other people told me they used pawnshop loans for gas money. And as I explained in my last column, the pawnshop business does well when gold and silver prices are high. Gold is half a pawnshop's inventory. Plus, rising gold prices lets the pawnshops make bigger loans and earn more interest.

Finally, pawnshops do well when credit is tight. That's the case right now. The collapse in real estate values has caused millions of Americans to default on their mortgage loans, auto loans, and credit-card loans. The banks won't lend to people with bad credit reports. You don't need a high FICO score to borrow money from a pawnshop.

I think now is a great time to invest in pawnshops. EZCORP plans to open 100 new locations in 2008. And the CEO said he expects earnings to increase by 28% this year. Last week, Cash America – the largest pawnshop operator in America – also raised its guidance for first-quarter earnings.

Here's the thing: Investors put pawnshops in the same bracket as "financial" stocks. The stock prices of these two pawnshop operators have fallen 25% and 15% from their 52-week highs. With business so strong, and stock prices off their highs, pawnshops look like a great deal right now...

Good investing,
 
Tom

Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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