6 stocks that cash in on Americans' debt

Debt is big business, and companies that serve the needs of borrowers and lenders can be a great investment.

By InvestorPlace Feb 1, 2013 3:48PM
WorriedMan copyright CorbisBy Lawrence Meyers

iplogoI love stocks involving debt. Even though the American consumer is wisely deleveraging, companies that let people create debt are diversifying, companies that service debt are booming with no risk, companies that provide subprime debt are going gangbusters and companies that buy bad debt are on fire.


Debt is a big part of our economy, and that means you can find stocks that profit from it.


Visa (V) and Mastercard (MA) essentially own the credit card business. Yes, American Express (AXP) has its niche, and Discover Financial Services (DFS) has its fans. But the industry's two gorillas not only own it, they're making money beyond their core business.


Both companies transfer information and value across financial institutions, businesses, consumer and the government. They have many payment platforms. They have risk-management divisions, fraud services, research services, security services, consulting services and a host of other products. Both Visa and Mastercard trade at 21 times earnings on 18% growth. The premium is a small price to pay for a virtual oligopoly.


Bank of America (BAC) emerged from the mortgage crisis with a gigantic victory. It purchased Countrywide for a song, realizing that the true value wasn't in the portfolio of crap mortgages it could write off, but in the mortgage-servicing business Countrywide owned. Today, BofA services 80% of the nation's mortgages, without having exposure to the paper itself. That's pure no-risk income.


EZCorp (EZPW) has massive pawnshop operations both in the U.S. and Mexico. In the latter, 80% of the population is a potential pawn customer vs. 20% in the U.S., and both EZCorp and First Cash Financial Services (FCFS) are capitalizing on this demographic by expanding rapidly into Mexico.


EZCorp just brought on a new chief financial officer with an expertise in acquisitions, and the company grabbed an online payday lender, which will prove to be a huge revenue booster. The company also purchased a controlling interest in a Mexican payroll lender. That will allow it to lend money to employees and retrieve payment directly from payroll, reducing defaults over the traditional payday loan.


EZPW is the single cheapest stock I've been able to find in the market. Fair value is $39, yet it trades at just under $23 -- more than a 40% discount to where it should be. It is my single largest portfolio position.


The second-cheapest stock I can find, and I also own, is Portfolio Recovery Associates (PRAA), which buys up bad debt for literally a penny or two on the dollar and tries to collect on it. It's doing a great job, too, generating $130 million in free cash flow over the trailing 12 months. Net margins are in-sane: 23%. That's net, not gross margin.


Porfolio Recovery is the ultimate arbitrage play, able to draw down debt at about 4% and earn multiples on that in exchange. The company will increase earnings 20% this year to $8.79 per share, which should give it a value of around $170. Yet it trades at $108, for a discount of 39%.


All of these are great choices for your portfolio, which is why I own several of them myself.


As of this writing, Lawrence Meyers owns shares of Bank of America, EZCorp and Portfolio Recovery Associates.


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16Comments
Feb 3, 2013 10:02PM
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Why does MSN allow these writers to post articles?   This is total crap!

Are you just coming out of a 6 year coma?  This has got to be news to BOA and the rest of the banking industry.  "It purchased Countrywide for a song", for real?  One of the worst moves a bank has ever made in history!  "BOA emerged from the mortgage crisis with a gigantic victory"; right and in 2007 the share price was over $50 per share... and where is it at now (11.71)?

"BofA services 80% of the nation's mortgages", no they don't.
Feb 4, 2013 12:57PM
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During the depression of1929, my mom lived on a small farm. Lots of people did back then . They had a garden and chickens and milk cows. No TV or gas powered cars. They might go to town on a Saturday for odds and ends. The bankers and politicians have moved us into a totally dependent lifestyle. They grow rich while we grow worried. I'm saving up to buy a small acreage so I can return to the freedom of the simple life. If they will leave me alone.
Feb 4, 2013 1:28PM
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Didn't Countrywide cost BofA like a hundred billion dollars in fines and litigation alone not to mention a reputation that went from bad to worse?
Feb 4, 2013 1:18PM
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Making money on the on the misery of others, a misery in many ways created by the very gangsters that are now profiting from the situation. I guess this in the new reality in America!!
Feb 1, 2013 4:56PM
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I'd like for someone explain why historically stocks perform better during a Democratic administration, and bonds perform better during a Republican administration. This appears to me to be the opposite of what one would expect. Democrats are perceived of as anti big-business, yet big business does well when they are in power. Republicans are seen as anti-debt, yet bonds (which are long-term debt) do well when they are in power. Are perceptions out of touch with reality? Or what gives?
Feb 4, 2013 2:19PM
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Mr Myers must be in the twilight zone.One of the worst decisions BOA ever made was buying up countrywide.That venture drug down BOA to its all time low of $5-$6 /share.Not to mention it lost billions on countrywide's subprime loans and illegal forclosures.Get real Mr.Meyers with that much of a foul-up ,what makes you feel this stock is a steal for the average investor?

Do your homework .Your recommendation gets a failing grade of "F". 

Feb 1, 2013 4:50PM
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you are talking about  Q1 Q2 Q3  RIGHT WAS SUPPOSE to make  jobs and get people off of unemployment food  stamps  lol wages went  down gas went  up   ya i guess are debt is something to be  proud  of
Feb 4, 2013 1:51PM
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So what happens when the dollar starts inflating the way it's being engineered to? Answer:  These companies will own a whole bunch of very little. 
Feb 4, 2013 3:03PM
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They don't actually want us to make any money unless it is taxable.
Feb 4, 2013 12:07PM
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Inflation should be forming as a funnel cloud as we watch,but the path will be unescapable,forgive the pun,it will be countrywide.We will all be in the vortex so fast we won't know what hit us,and even the financial planners who thought they had a plan,will have no way to control the tumbling actions. Gold won't save you if you can't hold on to it,perishable food won't last long enough,and canned products will get contaminated.I do not have a solution or a plan,but neither does MSN writers.
Feb 4, 2013 3:21PM
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Consider the objectivity of the author of such an article as you read the closing paragraph:

"All of these are great choices for your portfolio, which is why I own several of them myself."
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