|Stocks To Short?
TMF News' Short
Advanta Corp. (Nasdaq: ADVNA)
5 Horsham Business Center, 300 Welsh Rd.
Price - $29 3/4
Advanta is foremost a credit card company known for taking on risky clients
who max out on credit, and criticized for gimmicky fee structures and lots
of fine print. To prepare for a possible downturn that basic business, Advanta
has been diversifying. It has added a venture capital business, a consumer
loan service, and nonstandard auto financing, among other things.
They're a great short for a number of reasons-- among them, that many customers
don't like the way they do business, and that their search for heavy credit
users puts them at risk for lots of defaults in an economic downturn. If
Advanta cleaned up its gimmicky practices and dealt with more responsible
borrowers, its recent diversification could prove a plus... diluting Advanta's
value as a short.
Recent losses were largely due to charge-offs and profit margin pressure...
in all total $20 million during the quarter that reported last month. In
May, Standard & Poor's lowered its ratings of Advanta's debt to
double-B'-plus from triple-B'-minus, and placed the ratings on CreditWatch.
S&P thinks credit card charge-off levels won't improve for at least several
quarters because of the continuing high level of consumer debt. The levels
industry-wide are already above recessionary levels. With Advanta already
at the top of the danger pile, heed the woeful prediction that a recessionary
climate is likely to result in more severe deterioration in credit card
portfolios than is currently being forecasted. For Advanta to remain a great
short, they need to stick to current practices, and its customers need to
feel a tiny economic squeeze.
Advanta, at 29 3/8 on June 2, is between a year high and low of 56 3/4 and
20, respectively. It can brush that year low again at the first sign of economic
trouble for its customers.
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* This column represents the opinion of one Fool and in no way should
be taken as the opinion of either the Motley Fool, Inc., the company in question
or representative of anyone or anything else other than that specific Fool's