It's Take Two for This ONE

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Over a year ago I added financial services company Higher One (NYSE: ONE  ) to my Motley portfolio. As a young company and one still relatively new to the public markets, its story piqued my interest enough for me to take a small position. Today I'm taking advantage of a short-sighted market and buying more.

Four for ONE
In line with my investing philosophy, there are four things I look for when considering any investment:

  1. I want management I can trust. They need to be in it to win it, and they need to be honest.
  2. I want a business that is understandable and that I can enjoy following.
  3. I want a catalyst -- a short-term event or long-term trend that will help create value.
  4. I want a fair price. Enough said.

Management I can trust; in it to win it
One of the things that attracted me to Higher One from the very beginning is that it's an owner-operated affair. Higher One started out as an idea among three college friends who were looking to expand the purchasing power of their student ID cards. Today co-founders Mark Volchek and Miles Lasater currently serve as CFO and COO, respectively, and collectively own over 6% of the shares outstanding.

CEO Dean Hatton, who helped take the company public in 2010, is stepping down to let the founders take the reins. By the end of this month, Mark Volchek will transition to the role of CEO and Lasater will take on the role of president in addition to COO. I even had the good fortune to interview Lasater back in April 2011, and you can see part 1 here and part 2 here.

Understandable and interesting
Higher One isn't too difficult to grasp: It helps colleges by facilitating the refund and student aid disbursement process with its proprietary software and helps students by offering banking services such as the OneAccount student checking account through its multiple banking partners.

Partnerships with card service companies such as Fiserv (Nasdaq: FISV  ) and MasterCard (NYSE: MA  ) offer students a banking relationship very much like any other, complete with a debit card that in many cases also doubles as a student ID card.

A long-term trend
Students will continue to go to school and they'll continue to borrow to do it. In this respect I like that Higher One is making the process more efficient by saving schools from doing some of the grunt work.

There has certainly been plenty going on in the banking industry, and while the Durbin Amendment limiting debit fees doesn't directly affect Higher One, banking and payment processing are perennial targets for criticism. Recently at an investor conference, Higher One management did well to clear up some of the misconceptions of their business in regard to fees and revenue-sharing with schools. I give them credit for working to get this out of the way so they can focus on the business at hand.

All at a fair price
When I first bought Higher One, it served over 675 schools and maintained approximately 1.8 million OneAccounts. Today the company serves over 830 institutions, and OneAccounts total 2.1 million with plenty more in the pipeline.

Recent shortfalls in enrollment have stifled growth, but longer-term projections for enrollment according to government data support a return to low single-digit growth. The stock trades today at about 14 times full-year projected earnings, which I think underestimates its long-term potential. The pause and misconceptions may be scaring some away today, but I think it's opened up a window of opportunity, so I'm adding another $500 to the position.

Higher One, take two
I'm encouraged by what Higher One has done to date. I believe that management is committed to the success of the business and I'm excited to watch the company grow and develop. While short-term concerns over growth may have some headed for the exits, this Fool senses opportunity and I have the time to watch it play out. Make sure to follow me on Twitter to keep up with all of my Motley recommendations.

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Jason Moser is an analyst with Motley Fool One and Stock Advisor. He owns shares of Higher One. The Motley Fool owns shares of MasterCard and Higher One Holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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