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Profiting From Deadbeats: Under the Radar

A lot of investors are bailing on Portfolio Recovery, perhaps fearing the recession and the payoff from cheap purchases will be extended. Its stock lost 10% of its market value in last week's sell-off. A beta of 1.4 demonstrates volatility.

But on the basis of valuation, Portfolio remains attractive. The shares trade at a price-to-earnings ratio of 15, and a forward price-to-earnings ratio of 13, a discount to the market and specialty finance peers. This is a niche company with complex risks, but it's deserving of further attention.

One intriguing, counterintuitive thesis is that companies are charging off more than necessary in order to purge weak debtors. It doesn't make sense, from a business perspective, to charge-off customers who are profitable.

On the other hand, the Congressional backlash against credit-card companies and ongoing threats of fee reductions are providing incentives to companies to seek reliable customers and reduce exposure to previously lucrative deadbeats. Front-loading losses will make future performance look better.

There's also a possibility that sly consumers are riding the waves of bankruptcy and default. An influx of paperwork might be creating cracks in the system and many so-called uncollectibles could turn out to be collectible, but crafty.

-- Reported by Jake Lynch in Boston.

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