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Advanta Corp. (Nasdaq: ADVNA)
5 Horsham Business Center, 300 Welsh Rd.
Phone: 215-657-4000
Message Board
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 thoughts.

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