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Profiting From Deadbeats: Under the Radar

"Under the Radar" uncovers little-known companies worthy of investors' consideration. Check in at 5 every morning to find out about stocks that tend to beat their bigger brethren.

BOSTON (TheStreet) -- The U.S. credit-card charge-off rate -- debt considered a loss -- at the likes of Visa (C), MasterCard (MA) and American Express (AXP) rose to 11.5% in August. Delinquencies are also on the rise, a sign debtors are still being pummeled by the economy. Is it possible to profit from this unfortunate situation?

Norfolk, Virginia-based Portfolio Recovery Associates (PRAA) is a specialty finance company that purchases and collects defaulted consumer receivables. Banks, credit-card companies and auto financers sell their "uncollectibles" to Portfolio Recovery for pennies on the dollar.

The company has a proprietary system to identify defaulters who are likely to pay up. They seize or force the sale of assets to collect a portion of the amount owed. A catastrophic recession throws a wrench in the gears, since the extent of debt defaults is extreme.

That can affect business in one of two ways: either economic pressures crimp the collection process or they allow Portfolio to scoop up profitable defaulters. The cost of receivables is falling, so the company can pick its price. But profit from such purchases may not materialize for years.

Anyway, the company's second-quarter net income rose 3% to $12 million, and earnings per share inched up 1% to 76 cents. Revenue grew 12% to $71 million. Volume squeezed margins. Its gross margin dropped from 36% to 33% and its operating margin fell from 33% to 30%.

Nevertheless, the stock looks attractive, especially considering recent pessimism. The shares were downgraded by Davenport on Aug. 6 due to strong price performance, insider selling and a weak near-term earnings outlook. Since the downgrade, the shares have fallen 2%.

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