In a story published by Investor Place, the author describes how his debt collection stock was purchased cheap and shot up 20%. The writer calls his debt collection agency, a “perpetual cash machine.” He also asserts that most debt collection agencies are going to yield similar results, so long as the company is willing to work hard, hire the right collectors, and properly assess debt portfolios.
“Cash collections were up 27% year-over-year, revenues were up 31%, net income up 35% and diluted EPS up 35%. For the full year, revenues soared from $459 million to $593 million, net income was up 26% to $126 million and diluted EPS went from $5.85 to $7.39.”
For the laymen, that’s incredible, monumental earnings – these earnings are ideal for investors because they’re increasing steady, and they forecast steady increases, and therefore the stock can be bought low, sold high, and profits can be made during both the long and short term…
Why isn’t everyone buying stock in debt collection companies?
Debt collection companies may be big earners, but they have a horrible reputation. Debt collectors are notorious for calling debtors at home, at work, and even at a relative’s house. They exhaust every legal avenue in order to regain lost revenue and, by doing so, they’ve gained a horrible reputation. This negative reputation has caused investors to shy from profitable stocks on moral principal alone…which doesn’t make total sense when you consider why debt collectors have to make so many calls, and sometimes take legal action.
Is it really the debt collector’s fault? If a debt is incurred, isn’t it the individual who is obligated to repay it? They borrowed money, so they are obligated to pay it back.
Debt collectors help people and businesses!
Debt collectors are not the enemy. In fact, there is no enemy. These are just regular folks doing their jobs, and their job is to convince people to honor their obligations. Sometimes, debt collectors actually help people by reducing the amount owed, by offering lump sum payments or a recurring payment plan. This isn’t wrong – it’s smart business and it helps to improve the credit score of anyone willing to work with the collector, and it improves the portfolio of anyone willing to invest.
For business, especially, debt collectors are extremely helpful.
Imagine you run a credit institution in downtown Los Angeles. You’ve offered credit to many, and now many aren’t paying you back. Your in-house people are not qualified to successfully get these folks to pay their debts. They’re yelled at, taunted, hung-up on, and worse they’ve caused you some legal trouble by calling outside of legal calling hours and making threats. This isn’t good, and could spell disaster for your fledgling business. What do you do? You contact someone like LA Collector and you let them assume the role as debt collector. You’ll recoup your losses, and although your customer may learn a harsh lesson, their credit will improve after paying the debt. It’s a win-win!
Debt Collection is Smart investing
According to Investor Place, his debt collection investment “pumps out cash flow – about $130 million in the TTM. As long as its debt service remains in the 3% - 4% range, that cash flow might eventually be able to provide a dividend to investors….the company is expected to grow EPS at a 20% rate this year, 12% next year and 15% over the long-term.” If that doesn’t make you want debt collection in your portfolio, you’re too hung up on the reputation of these companies.
The following article is from one of our external contributors.
It does not represent the opinion of Benzinga and has not been edited.