Wednesday, April 04, 2007

More on Asta Funding (ASFI)

If you bought Asta Funding [ASFI] when I called it a buy in November you've gained 30% in 5 months. Not bad for a company specializing in distressed debt recovery which should do great even if the economy goes down.

Then in February I did an analysis after they revealed a very large purchase of distressed debt at higher than average prices and determined it was still a keeper even though I had questions about the large tranche of debt they had purchased.

Well, March 9th Asta had a special call to talk about their strategy and update investors (I LOVE companies that think like that). My questions were answered and I reiterate my belief that this is a good stock.

Management called the purchase of $6.9 billion (face value) debt for $300 million "one of the larger purchases in the marketplace ever." And this was certainly true. Most debt handlers buy that much debt every 24 months, total.

On the call, management identified several reasons why this pool of debt is not merely bigger, but also of higher quality than the average portfolio.

First, the bulk of the portfolio is credit card debt, which is Asta's most familiar territory. This is also excellent space to be working in due to the new Bankruptcy Abuse Prevention and Consumer Protection Act which makes it much more likely to collect on credit card debt.

Second, the geographic mix of the receivables is more favorable than normal -- fewer Texans (notoriously uncollectable), more New Yorkers (amazingly collectable - theories as to why are welcome :) ).

Third, and most important, $1.1 billion of assets in the pool have gone through litigation, and judgments have already been awarded. That means increased returns for Asta. Another "significant" portion of the receivables are what management calls "sue-able." This means that judgment against those customers should be swift and predictable. And again due to the new credit card law that debt is worth a whole lot more than it would have been a few years ago.

In fact I would say that Asta looks likely to increase their margins on this batch of debt and I'm very happy management looked at the situation, analyzed it, and was willing to go to a 2:1 debt to equity position to buy this new collection of debt. This is an example of exactly what you want to see: management using its knowledge of the business to maneuver profitably!

Others are starting to get the picture. Asta has been seeing major institutional buying recently and this should continue. Over on Motley Fool 73 out of 75 "All-Star" investors give ASFI the thumbs up as well, pushing ASFI to the top of the CAPS list.

An additional interesting point is that this stock is heavily short sold. The stock has short sales against it equal to 45% of the outstanding stock and regularly appears on the SHO list, which means that the short sellers aren't delivering the stock they are required by law to deliver. I hate that these things continue and dearly wish the SEC would crack down on those folks who are essentially counterfeiting shares, but the upshot is that with ASFI doing so well those shorts will have to buy shares to cover at some point and that spring loads ASFI shares for dramatic upswings.

We should all be owning ASFI because it's a long term good business, but the potential for a short squeeze is still interesting. If the squeeze hits and the stock shoots up I will need to do another analysis to see if it's gone beyond where it should be. Then it may be time to get out and wait for it to settle down (or just sell some calls.. although I never actually recommend that move since it's a highly personal decision for skilled investors only).

My history with Asta:

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Blogger Ramesh Shankar said...

I looked at ASFI. Business model is similar to PRAA.

While the financials may be sound, I am somewhat repelled by the whole debt collection industry.

However, as you said this industry will actually do well in a downturn, so it might be a good option for those not too queasy about the nature of the industry.

On another note, I have been reading the housing bubble blog -

These folks called the housing bubble quite early and are waiting for the crash. The blog itself contains snippets of news that show that housing softening in various locations. However, the comments are interesting. Many of the posters pitch in data points from their local area, and to me it looks like a spectacular housing bust is in the offing. Cannot understand why the stock market is shrugging the bad news off.

10:20 AM  

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