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One has to have been living under a rock for the last year or so not to have heard quite a bit about the mortgage meltdown and rising rate of home foreclosures.
Though there's more than enough pain to go around as a result of this mess, where there are big problems, there are often big opportunities. I decided I wanted to find a company (and stock) that might benefit from this situation. I believe have found a good candidate in Portfolio Recovery Associates (PRAA, news, msgs).
Portfolio Recovery Associates buys and collects on bad consumer debt. Though problems in consumer debt don't get as much press as the home loan debacle, the credit crunch will lead to higher defaults on all kinds of loans. Think a strapped homeowner might default on the loan he took out for a new wide-screen plasma television or new car before defaulting on his mortgage? If I were him, I know I would.
CAPS participant "Killim1," who sports a 96 rating out of a possible 100, shares this line of thought.
"How many people do you know are credit card or automobile debt free?," he wrote about the stock. "How many do you think will not be able to pay their debt by the end of 2008 or 2009? I am positive the credit card debt has some linkage to the recent 'sub-prime meltdown syndrome.'"
Of course, Portfolio Recovery Associates sports the highest possible CAPS rating: five stars. In addition, it's currently trading about one-third off its 52-week high of $65.66.
A five-star CAPS stock, trading well off its 52-week high, in a business that is poised to benefit from the credit mess? Count me in.
I'm also liquidating my position in the Vanguard Small-Cap (VB, news, msgs) exchange-traded fund. This is consistent with my strategy of staying fully invested in the market via ETFs and slowly replacing my ETF holdings with individual stocks as opportunities present themselves.
Though the ever-fickle market can change things in a big hurry, my strategy seems to be working pretty well here so far. I'm sticking with it.
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