SLM Corp (SLM) Has Risen 4% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Gator Capital Management’s top stock picks. Gator Capital Management, an investment management firm, is bullish on SLM Corp (NASDAQ:SLM) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on SLM Corp (NASDAQ:SLM) stock. SLM Corp (NASDAQ:SLM) is a consumer banking company.

In July 2019, Gator Capital Management had released its Q2 2019 investor letter. SLM Corp (NASDAQ:SLM) stock has posted a return of 4.3% in the trailing one year period, underperforming the S&P 500 Index which returned 16.2% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, SLM Corp (NASDAQ:SLM) stock has fallen by 5.1%.

In Q2 2019 investor letter, Gator Capital Management said the fund posted a return of 3.9% in the second quarter of 2019, underperforming the S&P 500 Index which returned 4.3% in the same period. Let’s take a look at comments made by Gator Capital Management about SLM Corp (NASDAQ:SLM) stock in the Q2 2019 investor letter.

“SLM Corporation (“SLM” or “Sallie Mae”) is the holding company for Sallie Mae, the largest lender in the private student loan market. We have owned Sallie Mae for three years and wrote to you about it in our Q2 2016 letter when we reviewed our investment theses on several consumer finance stocks. We believe Sallie Mae is an attractive stock at the current price. We understand the reasons Sallie Mae’s stock is cheap and think other investors should not be concerned about them. Also, we believe the market is missing a free option in Sallie Mae if the federal government decides to end or privatize its Direct Student Loan program.


Sallie Mae’s stock price declined 9% after releasing Q2 earnings. We think the company posted an in-line quarter. There were a few items that management was able to explain on the conference call. One issue was an addition to loan loss reserves due to the accounting for troubled debt restructuring. This is a non-issue because it does not represent(reflect) the cash flowing to the company and the accounting for loan loss reserves is completely changing in six months. The other issue was a rise in charge-offs during the second quarter. Large charge-offs are seasonal with the peak in Q2. New graduates make their first payments in November of each year and the lender has to charge-off the loan after six months if there are no payments. There is a group of loan charge-offs in May of each year for the group of previous year’s graduates who never make a payment.

Oftentimes, we a company’s shares decline on the day they release quarterly earnings because of a knee-jerk reaction by investors. The shares then recover over the following days as other investors realize the long-term story is unchanged. We have observed that generally, only stocks with simple stories and clean earnings reports react well to earnings reports. If there is any complexity to the company or the earnings report, the reaction to earnings seems to be negative.


We believe generalist investors have a misunderstanding of the student loan market. We all see scary headlines about $1 trillion of student loans outstanding and default rates of 10% or higher. We think this leads to a quick hard pass on Sallie Mae in investors’ minds. We think investors should look at Sallie Mae differently. In 2010, the federal government nationalized student lending for loans under $31,000 to undergraduates and $138,500 for graduate students. It stopped the previous student loan program (FFELP), where banks would make subsidized loans guaranteed by the government. Instead, the federal government makes all loans below these loan limits, and these loans account for 90% of all student loans outstanding. Private student lenders like Sallie Mae only make loans above the federal government’s loan limits and only make the remaining 10% of student loans.

There is a variety of quality in student lending. Using the federal government’s database, we can see default rates by school. There are loans to students at high-quality schools like the University of Virginia, where the default rate is around 1%. Then, there are schools like Artistic Nails & Beauty Academy, where the default rate is 22%. The federal government’s loan program makes loans to both schools, but Sallie Mae can choose which schools and students it offers loans to.

We agree there is a student loan problem. Too many for-profit schools are preying on people from weak backgrounds. The for-profit schools encourage students to take out loans to pay for programs that don’t provide the earning power to repay the loans. Or, the students don’t finish the programs. Private student lenders, like Sallie Mae, make loans to students at higher-quality schools. Parents act as co-signers on 80% of the loans made by Sallie Mae and have an average FICO score around 740. Default rates for these loans are in the low single-digit range. As with all student loans, the loans are not dischargeable in bankruptcy. Plus, they are not making loans to students at beauty salon schools like the federal government does.


According to student loan industry data aggregator MeasureOne, Sallie Mae has a 55% market share of originating private student loans. This market share has been consistent for the past five years. We attribute this to Sallie Mae’s salesforce that works with the colleges and universities to improve the enrollment process.


Sallie Mae has posted returns on common equity (“ROE”) in the 22% range for the past couple of years. Returns have reached this level as the company’s loan portfolio has scaled. We believe the ROE is sustainable. This ROE is higher than any of the major regional banks. Currently, only M&T Bank is projected to have a ROE of greater than 20% for 2019.

Sallie Mae’s financial metrics would place it as the highest return and fastest-growing bank, but its stock is trading at a lower P/E multiple than any regional bank (w/ Mkt cap >$10 billion).


Sallie Mae showed very strong operating earnings growth and leverage in Q1 of 28%. Revenue grew by 22%; expenses only grew by 12%. We believe earnings will continue to grow in the high-teens range. Growth will decelerate modestly as the portfolio size catches up with the originations and with short-term interest rates pausing.


Sallie Mae trades at 7.5x 2019 EPS and 1.56x price-to-tangible book. These are very inexpensive multiples compared to its history and to regional banks (as discussed above).


As Sallie Mae has achieved a 20% ROE and the portfolio has grown to match its origination ability, Sallie Mae has started to return excess capital to shareholders. Sallie Mae pays a 1.25% dividend and has a $200 million stock repurchase authorization. Interestingly, the management repurchased $60 million of stock in Q1 2019. These capital return decisions are important signals that management knows they work for the shareholders.


Sallie Mae has an improved funding profile compare to the company’s funding before the Great Financial Crisis (“GFC”). Before the GFC, Sallie Mae’s source of funding was the ABS market. This presented a problem when the capital markets shutdown. Sallie Mae now has a bank and can fund itself through customer or brokered deposits. Sallie Mae’s improved funding profile reduces the risk that its business operations will be interrupted by an unrelated capital markets event.


We believe the political risk is misunderstood for Sallie Mae because of company history. That risk has gone away with the federal government nationalizing 90% of the student loan market. The two different political risks we hear most frequently mentioned are not issues for Sallie Mae.


Some investors are worried if Elizabeth Warren is elected President that she will make college free for everyone. With free college, “Who will need a student loan?” We became comfortable that private student loan demand will still exist when we learned about Sallie Mae’s experience with New York state’s Excelsior Scholarship Program, which provides free tuition. The NY state program provides free tuition to NY residents, if they maintain a B average, earn 30 credit hours per year, and commit to work and live in NY state for every year they receive free tuition. In the first year of this program, Sallie Mae’s loan originations to students at NY state schools declined, but in the second year, Sallie Mae’s loan originations surpassed the prior peak, and they grew again in the third year. We believe that the government will place eligibility requirements on any free tuition program, which will make it difficult for every student to get “free tuition.”


Another investor concern is that a potential expansion of the federal government Direct Student Loan Program could take share from private student lenders. Given the current political climate, the current concerns with the Direct Student Loan Program, and a growing belief that additional student loan programs simply lead to tuition inflation, we think it is very unlikely that Congress will expand the Direct Student Loan Program.


As discussed above, the student loan problem is a federal government student loan problem. If the federal government ever exited direct student lending, Sallie Mae is in a prime position to capture a large percentage of the market. There was a chance in the last couple of years that the federal government was going to curtail its Grad Plus loan program, but the program survived. With Democratic control of the House of Representatives, we place a lower chance on a reduction in the federal student loan program, but we’ll be happy to own a free option with no expiration date by owning Sallie Mae’s stock.


Sallie Mae is an attractive potential acquisition target for a bank needing to generate more loans. With the flat-toinverted yield curve, banks do not earn enough spread on fixed-rate commercial mortgage loans. These loans usually price off of the 5-year Treasury. Instead, Sallie Mae’s loans are floating rate, have a large spread, and are much more attractive assets to hold on a bank’s balance sheet than 5-year fixed rate loans. We think Sallie Mae is an attractive acquisition for a bank with a strong deposit franchise that needs more loans for the asset-side of its balance sheet.



On January 1, 2020, all financial institutions will have to change their accounting for loan loss reserves. Instead of holding reserves for the next 12 months of losses, they will have to hold reserves for estimated lifetime losses. This will cause a substantial increase in loan loss reserves for consumer lenders like Sallie Mae. Although this is purely an accounting change and will not affect cash, Sallie Mae will see a 28% decline in book value. Investors may assign lower valuations to financial companies due to lower book values. With that being said, our earnings estimates for Sallie Mae will not change materially due to this accounting change.


The private student loan market has had rational competition for the past few years. In January 2019, the standstill agreement between Sallie Mae and Navient expired. Navient stated they intend to enter the private student loan origination market. While we think Navient will be a strong competitor, it may take them several years to gain significant market share. We anticipate a more competitive industry in our models.


If a person declares bankruptcy, their student loans do not get wiped out. There is a persistent threat that Congress will change this. We think if this changes in the future, it will only apply to future student loans. If this were to happen, we would expect student loan providers to raise interest rates on future loans to compensate for the higher expected losses.

We believe Sallie Mae is attractive due to its low valuation, fast growth, and high return on equity. We believe it is even more attractive compared to generic regional banks that have higher valuations, lower growth, and lower ROEs.”

Easiest Countries to Become a Lawyer

Iakov Filimonov/

In Q2 2020, the number of bullish hedge fund positions on SLM Corp (NASDAQ:SLM) stock increased by about 19% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with SLM’s growth potential. Our calculations showed that SLM Corp (NASDAQ:SLM) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.