Growth Report Free
growthreport.com
Volume 5, Issue 22
March 3, 2005
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Slip Sliding Away
When bullish fundamentals are your only source of consolation.
Stocks can often behave in ways we least expect. They can be good, bad, or even slippery. Asta Funding Inc. (Nasdaq: ASFI), a consumer receivables and asset management/liquidation company, has recently proven to be much more of the latter and much less of the former; which makes deciding what to do with it that much more confusing.
I first wrote about Asta as an interesting opportunity in April 2003, and the thesis seemed as simple then as it does now. Consumers were, and are, accumulating more personal debt than ever before. In fact, debt as a percentage of disposable income was skyrocketing. Though interest rates were low, they would likely only be heading in one direction – up! If the economy continued to stall, or at the very least failed to recover in any meaningful way, many many consumers would find it increasingly difficult to pay off their debts, particularly their credit card debt which was Asta’s sweet spot. (Asta and a few other companies were in the business of purchasing ‘distressed assets’ from credit card companies for pennies on the dollar and then recovering for themselves what the previous companies could not; yes, aka, a collection agency.)
As I said, that was back in April 2003 when the stock was trading at roughly $10 per share. A year later, after the stock had doubled and split, I covered Asta again, convinced in my belief that shares would continue to head north. Given that this column is a ‘buy and hold’ analysis of the more longer-term strategies for investing, the logic of having faith in Asta’s longer-term economics seemed sound. Profits had doubled between the first and fourth quarters of 2003, total household debt as a percentage of total disposable income had eclipsed the 100 percent mark, the average consumer was carrying at least 8 credit cards, and the average balance of pure credit card debt was closing in on $10,000. Even if Asta was facing stiffer competition from other industry players including NCO Group (Nasdaq: NCOG), Encore Capital Group (Nasdaq: ECPG) and Portfolio Recovery Associates (Nasdaq: PRAA), there seemed to be plenty of business to go around.
As of February 2005, things couldn’t have looked much better. Asta’s stock had climbed another ten points, reaching a 52-week high at $29.23 just as the company announced that its first quarter profit had risen 32 percent from a year ago. The company earned $6.2 million, or 43 cents per share, up from $4.7 million, or 33 cents per share, during the same period last year. (Analysts were expecting earnings of 42 cents per share.) Revenue had risen 21 percent to $13.8 million from $11.5 million a year earlier, and costs were being held under control given the company’s smart business model of outsourcing its collections management.
The caveat in all of this came when the company warned that the number of portfolios that meet Asta's acquisition criteria may actually decrease; though being selective might mean being smart to some people, it means that future revenue might also be constrained by a lack of appropriate debt to be acquired; such is the nature of increased competition in the ‘asset recovery’ business.
Needless to say, the stock tanked. What had been a perfect ‘hockey stick’ chart – up and to the right – suddenly had cracks in it; and investors who trade based on technicals took notice. The stock fell through support levels and a strong uptrend line at $25 per share, and kept falling – appearing now as if it is headed to $20 support levels. Though insiders still own at least 50 percent of the stock, and the company has kept a lid on incurring too much debt, investors might be worried that return on equity is softening over time and a lack of Wall Street analyst coverage hasn’t done much to attract large institutional investors. Moreover, a recovering economy has created the perception that perhaps consumers will be in a stronger position to pay off more of their debt on time; not likely, but it’s a nice thought.
Yet, the data investors ought to be paying attention to actually signal ever larger amounts of debt. The Federal Reserve Board reports that total outstanding consumer credit stands at more than $2.09 trillion. That figure doesn't include mortgages and debt secured by real estate, but it does include $788.9 billion in credit card and other revolving debt. And for those who worry that Asta will slow its acquisition of portfolios of credit card debt, the company recently reported that it purchased portfolios during its first fiscal quarter 2005 worth more than $1 billion for about $36.5 million, which means it is already outpacing its acquisitions for fiscal 2004 ended in September, during which Asta spent $104 million on portfolios with a total face value of $2.8 billion.
Now, the toughest part of all of this is the fact that the stock has continued to slide for apparently no good reason (though I suspect the technical traders are driving the stock down more than we know.) After such a healthy 200 percent run over the past 2 years, it’s a bit difficult for long-term bulls who are trading the stock based on the fundamentals to stomach such a slide and not panic. Savvy investors who placed stop-loss orders on the way up should have been well protected on the way down; and options investors might have equally hedged their risk.
If the stock continues to crater under $20, I’d become a bit more concerned that bad news is indeed afoot though has yet to be released by the company; never a pretty picture. In the near term, though active traders have likely made their money and are long gone, it would be surprising if Asta slipped much lower than current levels, and those bullish investors who have chosen to buy and hold the stock for at least another 6 to 12 months out should be rewarded with a much longed for rebound. |
