While bankruptcies may cause angst for banks and borrowers, they make the repo man salivate. And with everyone running around screaming that the subprime lending crisis is the end of the world, he’s in a good position to make some mad money. Cramer says that if you want to make money off the subprime crisis over the long term, Portfolio Recovery Associates is the company to own.
PRAA buys up and manages portfolios of defaulted debt. They pay pennies on the dollar for these accounts, and their collectors then bring in multiple times the purchase price of the debt over the next few years. It’s not easy to get money from bankrupt consumers, but PRAA still has managed to grow their cash collections by over 30% since going public in 2002.
Interestingly enough, though, the bears are all over this stock. PRAA’s stock price has dropped to almost $42 from $49 and change since Feb. 20 because of the panic surrounding the subprime market right now. What’s worse, as of January over 28% of the float had been sold short. But Cramer notes that there’s no solid evidence to support the decline and negativity – earnings were great (better than expected), and there’s no bad news coming from the company.
As far as Cramer is concerned, this is a great opportunity to buy in. There isn’t much risk, the company has a great balance sheet, there’s very little debt, and it has $25 million in cash. And during the last conference call, management mentioned getting into mortgages, a potential growth driver in the future.
Currently PRAA is trading at a big discount to its historical average price-to-earnings multiple. If it goes back up to average, Cramer says it’ll go from $41 to $57 – over 40% upside.
Bottom Line: Subprime lending isn’t bad for everybody. Some companies actually benefit from the problem. PRAA is one of them.
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