Monday, February 12, 2007

Update on Asta Funding and Market tidbits

Today Finance Wonk buy company Asta Funding (ASFI) went up 10.45%. The market was apparently surprised at the strong earnings and business progress they are making. If you read my call on this stock last november you should have been expecting the results we saw in the report last night.

Asta Funding has been falling out of favor lately because the hedge fun fan-boys on Wall Street have seen hedge funds snapping up distressed debt. They see this as a challenge to ASFI and have issued numerous dire warnings that it will see increased costs acquiring debt.

Is this true? I'm more than willing to sell a stock if the business doesn't make sense anymore.

Asta announced a large new debt portfolio purchase at the same time they announced breakout earnings. The purchase is nominally a $6.9 billion debt portfolio bought for $300 million dollars. This amounts to 4.3 cents per dollar of debt purchased. If we go back to 2004 Asta was buying debt for 3.4 cents on the dollar, and in 2005 much debt was purchased for 2.8 cents on the dollar.

So there are indeed rising costs at the base of Asta's business. On the other hand the new Bankruptcy Abuse Prevention and Consumer Protection Act should increase collections significantly as well. That's one of the reasons we bought this stock.

Debt takes about 5 years to work its way through the Asta recovery process. We should have another 2-3 years of outsized returns and then a return to the stable long term earning that has powered this stock for years. The Net Present Value discount should be plenty to absorb this transition, and much cash will be generated along the way. If Asta can grow earnings at 7.8% annually for 10 years the net present value discount is a remarkable 20% -- currently the growth is almost 3 times that target!

A little math tells me that they should exceed my targets for at least another year, at which point they can grow at the sedate pace of the economy and still be a good investment.

My guess is that we will see enough rise in recoveries to justify the slightly higher price of debt and in the meantime Asta's old portfolios should generate the cash to attack the market. Management will surely exploit that. I also will look for a pop in the stock when buying distressed debt stops being a fad among hedge funds. When those hedge funds want out Asta should get any number of choice portfolios at discount prices using their cash reserves.

Warren Buffet always says to buy a business, not a stock. I like Asta as a business and a management team more than most of my stocks. I'm keeping my position in Asta, thank you very much.

Invest Well,

FW

== Market Tidbits ==
(via WSJ.com)

James Picerno of Capital Spectator doesn’t believe the inflation threat has been adequately doused, and believes current bond yields don’t reflect the risks. “By our reckoning, the bond market isn’t pricing in the longer-term threat of inflation,” he writes. “Maybe that’s because long yields are lower because of an excess of foreign purchases of Treasurys. Or maybe investors overall are overly focused on tomorrow vs. 10 years hence. Nonetheless, the inflation risks spawned by government spending are quite real, and strategic investors should pay heed.”

Chris Perruna has a few words on trading, and how emotions play into it. “As soon as money is involved in a transaction, whether it be the stock market, real estate, art work or antiques; emotions ultimately set the final price,” he writes. “Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain situations and events. One common trait many novice and advanced investors share, including me, is placing a position in a stock at the wrong time.”



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