Three ways to profit from America’s rising debt

It was a crisp, cold night. 8:30 PM. I was dressed in black, as was my friend and partner-in-crime. (He asked that I not use his real name, so I’ll call him Pete.)

As Pete has done hundreds of times before, he was directing a covert night-time operation and I was tagging along with him in his specialised tow truck.

Pete’s very good at what he does. He has to be – he steals cars for a living…

The ‘deadbeat business’ is booming

However, unlike regular car thieves, Pete never ends up in jail. That’s because his business is totally legal. He’s known as a “Repo Man” – a guy hired by local banks and other loan agencies who want the asset back because the owners have stopped making their payments.

And as America struggles under its heaviest debt load in history, it’s no wonder that Pete’s business is booming. Weighed down by huge mortgages, car loans, and high credit card balances, consumers are defaulting in droves. Just look at these grim statistics:

One in five homeowners are underwater on their mortgage payments. Credit card delinquency rates are at 4.54% – an all-time high. Auto delinquency rates continue to rise – the rate is now almost 1% of all auto loans.

The Department of Education estimates that student loan default rates hit 6.7% in 2009 – a 29% jump over 2008. The number is expected to rise further.

The thievery corporation

On the night I joined Pete, we were looking for a BMW whose owner had stopped paying for it. Pete’s two assistants were in a separate vehicle, responsible for locating the car. The radio cut into our conversation: “We’ve got it. In the side lot at the ABC Pizza Place… blue 528i BMW… licence number XYZ-123 right?”

“That’s it – we’ll be there in under a minute. Keep an eye out,” Pete replied. What happened next was impressive. As we pulled in to the parking lot, Pete quickly backed the truck up to the car and deftly manoeuvered a special hydraulic clamp under the BMW’s front wheels. He then lifted the front of the car and we headed out. Total elapsed time? About 15 seconds.

After a mile or so, Pete pulled over and properly secured the car’s wheels for the 20-minute drive back to his impound yard. “That one went down just the way you want them to,” he smiled.

Finding vehicles is tricky sometimes. Owners can switch plates, hide the cars, or put them in storage facilities. But Pete’s quite resourceful, too. I asked him about the methods he uses to locate missing vehicles. He smiled: “Magicians never reveal their secrets.”

Once a vehicle is repossessed, the bank usually allows a grace period of three weeks, where the owner can pay up – usually in cash – to get their asset back. If he/she doesn’t, it’s typically sold at auction.

And Pete’s business is humming to the point where he’s now doubling the size of his impound yard and is even thinking of running a second repo crew. “We’re having a hard time keeping up with the demand from the banks,” he told me.

And while you can’t invest in Pete’s operation directly, there are ways to profit from the debt business. Here are three of them…

Three ways to profit from the debt default boom

Encore Capital Group, Inc. (Nasdaq: ECPG): The firm purchases and manages consumer receivables that banks have already charged-off. This includes credit card debt, deficient auto loans and unpaid telephone bills.

Encore buys these for pennies on the dollar and gets to keep the bulk of what it collects.

And business is booming. Fourth quarter results exceeded analysts’ expectations and current projections have Encore outperforming its peers in the credit services industry for the next five years. As for the stock… it’s rocketed 591% higher since hitting a low of $2.62 on March 13, 2009.

Asta Funding, Inc. (Nasdaq: ASFI): Asta purchases its receivables through privately negotiated direct sales, brokered transactions and auctions.

Consisting primarily of MasterCard, Visa and private label credit card accounts, Asta also provides repossession services.

Boasting a market cap of just over $100 million, Asta’s stock isn’t widely covered on Wall Street. However, just because Asta is a small firm doesn’t mean the gains are. Its shares are up 366% over the past year and it just notched up its first quarterly profit since 2008.

Portfolio Recovery Associates, Inc. (Nasdaq: PRAA): The company’s business model within the credit services industry is similar to Encore’s. It purchases, collects and manages defaulted consumer receivables. It also provides collateral location services (“Repo Men”) for banks and other credit originators.

And like Encore, Portfolio Recovery’s shares have surged since hitting lows last March – up around 179%.

Investing in such an industry isn’t for everyone. But with the situation likely to get worse before it gets better, now is an excellent time to profit from America’s increasing debt levels. And investing in shares of the three companies above is a good starting place.

This article

was written by David Fessler and was first published in the daily investment newsletter
Investment U

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