Debt Collection Stocks Can Pay Off

Physician's Money Digest, April 2007, Volume 14, Issue 4

Who's coming after you if you don't pay yourcredit card bills? It could be worth it to findout, as consumer debt continues to climb.In 2005, total US consumer debt hit $2.2 trillion,according to statistics from www.creditcards.com.

Turning Debt into Profit

"Rising consumer debt is the catalyst for the threepublicly traded debt buyers," Daniel Fannon, a Jefferies& Co, Inc analyst, says. Although traditional privatedebt collectors working for clients are alive and collecting,some companies buy charged-off debts from creditcard lenders and banks for pennies on the dollar,making their money on the margin between theamount collected from the consumer and the purchaseprice. The current shining star of publicly traded debtcollection from an investor's point of view is PortfolioRecovery Associates (PRAA). The company is TheMotley Fool's Best Small Cap for 2007 pick, and alsoone of its Hidden Gems recommendations.

This Norfolk, Va-based company's goal of treatingcustomers well, and helping them through a difficulttime, while generating returns for shareholders seemsto be working. Portfolio Recovery's focused management,growth potential, and cash-rich operationsearned the praise of Motley Fool analyst Jim Gillies.

"Portfolio Recovery is valued at 2 to 21/2 timeshigher on earnings than Encore or Asset Acceptance,"Fannon says.

Collecting a Bargain

Encore Capital Group Inc (ECPG) in San Diego,Calif, takes a "friendly, but firm approach" to debt collection,evaluating debtors' payment ability, and usingskip-tracers if necessary to track down the unwilling."It's very cheap right now; shares have been beatendown," Fannon adds. "Recent results [fourth quarter]were disappointing. Our buy recommendation is basedon a better outlook for 2007-2008 and future opportunitiesfor the company to buy some cheaper debt."

Encore's stock is rated "hold" relative to the marketby Zacks Investment Research. Potentially on theplus side, institutional investors hold 64% of theshares, with company insiders owning 17%, accordingto Zacks statistics.

High bad-debt prices have also buffeted AcceptanceCapital Corp (AACC), although Jefferies & Cohas a "buy" recommendation on it also. As competitionfor debtor dollars has heated up, the Warren,Mich, company has expanded to medical, utility, cellphone, and health club debt.

With the credit card industry raking in billions infees from late-payment, over-limit, and balance-transferfees, you can pay your bills and then cash in on thegrowing debt trend.

The author of this article holds no position in any of the companies mentioned.