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

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!