My Top 2 Stocks: Portfolio Recovery Associates, Inc. (PRAA) and Biglari Holdings Inc (BH)

Page 1 of 2

“Lethargy bordering on sloth remains the cornerstone of our investment style.” — Warren Buffett, 1990 Chairman’s Letter to shareholders of Berkshire Hathaway

I like buying small companies with a long growth runway, dedicated and involved leaders, buying at a discount to my perception of fair value, holding for the long term, and periodically adding shares at opportune prices. I embrace “lethargy with every stock purchase, vowing to do nothing unless a game-changing thesis-breaker arrives. If chosen well and left alone, the gains can be very satisfactory. My two largest individual stocks Portfolio Recovery Associates, Inc. (NASDAQ:PRAA) and Biglari Holdings Inc (NYSE:BH) — each roughly 10% of my portfolio — have both reached such status by being bought well and then left alone. Each offers lessons for investors today.

Portfolio Recovery Associates, Inc.Giving debt collection a good name
Portfolio Recovery Associates, Inc. (NASDAQ:PRAA) buys defaulted consumer debt from credit card providers such as Mastercard Inc (NYSE:MA), Visa Inc (NYSE:V), and Discover Financial Services (NYSE:DFS); it also collects bankruptcy paper and has acquired a diversifying set of fee-for-service businesses in such exciting industries as back tax collection, class action lawsuit collections, and auto-loan collateral tracking (skip-tracing). It buys debt for pennies on the (face value) dollar and then turns that debt over to its collector workforce, which collects two to three times the purchase price over the next seven years.

Simple, right? The reality is that it requires experience to appropriately value debt, discipline to purchase the debt at reasonable prices, and well-trained collectors to work the paper. Overpaying is akin to burning money, and excellent pricing models are of questionable use if the collector can’t cajole debtors to pony up. Fortunately, disciplined pricing and collection has long been Portfolio Recovery’s strength.

This is a “knowledge business,” and thus Portfolio Recovery Associates, Inc. (NASDAQ:PRAA) is heavily reliant on the expertise of its management. Fortunately, they’re a gold standard team, led by co-founders CEO Steve Fredrickson, and CFO Kevin Stevenson after the pair did similar work at a division of HSBC. Attractive about Portfolio’s management is what they don’t do. They don’t provide earnings guidance or try to manage investors’ expectations. They don’t sacrifice long-term shareholder value for near-term reported earnings. They don’t get fancy perks like country club memberships, cars, or corporate jets, and the company eschews option compensation in favor of modest restricted stock grants. Senior executives are required to own stock alongside common shareholders.

Over the years, management has diversified its revenue: adding and aggressively ramping up unsecured bankruptcy account collections, legal collections on debtors identified as “can-pay-but-won’t-pay,” and controlled expenses to maintain profitability. I first purchased shares of Portfolio in 2004. Since then the steady hand of management has increased cash collections, revenues, and earnings 25%, 23%, and 20% annually, respectively.

And because there’s no shortage of debt, and thus charged off debt, Portfolio’s growth still has a long runway. I’ve added shares over the years based on a quick valuation heuristic I developed. My method compares the company’s adjusted enterprise value (market capitalization plus net debt, less an estimate of value for the owned fee-for-service businesses) to the expected remaining collections on owned portfolios (available in each quarterly report) after all cash expenses are paid. A number below 1.00 signals a company arguably being valued as worth more dead than alive, but this mispricing level is rarely seen (and should be exploited when it is seen). My valuation ratio currently sits at 1.56, which is decent, but I do tend to prefer to add below 1.30, which would require a stock price today around $100.

This is a quality company doing good things. Buy shares and add at advantageous prices, and then leave it alone to do its work.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!