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 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

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!