Quick Take: Stock of the Day

To take a page out of David Gardner's book, I thought I'd share my thoughts on my Motley Fool CAPS stock of the day.

If you haven't been following the new CAPS features closely or aren't on CAPS yet (horror! Join now), the stock of the day is a targeted daily stock recommendation from CAPS. The recommendation is based on a player's active pick list in CAPS, the picks from highly rated CAPS players with a similar portfolio, industries that the player has picks from, and a Foolish "special sauce" rumored to include both Frank's Red Hot and powdered dragon claw -- among other things.

Anyway, my stock today is Motley Fool Hidden Gems pick Portfolio Recovery Associates (Nasdaq: PRAA  ) . Portfolio Recovery is a specialty finance firm that works with credit companies such as banks, credit unions, consumer and auto finance companies, and retailers. The company primarily acts as an outsourced receivables collector and tracks down and collects from credit customers who are in default. It works in some cases as an outsourced fee-based service, while in others it puts up the capital to buy the portfolio from the lender.

I know what you're thinking, and, no, there's no mention of baseball bats as part of the business model.

Although growth has been slowing versus what the company saw a few years back, the top line is still steadily building. Net income margins for the company are a really impressive 24% as of year-end 2006. Despite the growth and margins, the stock trades at only about 16 times trailing EPS and has a PEG ratio of 0.79 (assuming analysts' expected five-year growth rate of 18%).

Turning to Portfolio Recovery's CAPS page, it has a pretty impressive record of 1,774 outperforms to a measly 43 underperform ratings. Even more notable is that the bull/bear comparison pits two players in CAPS top 1% against each other. On the bull side TMFPlatoish1 shares:

From what I can tell, this is the best in class of the debt collection and recovery industry. They have remained extremely disciplined in their purchasing methodology and have shown the confidence to wade in and buy aggressively when the pricing was right. They are dependent on being able to buy a continuing stream of charged-off paper at prices that will allow them to hit their target numbers on returns. A large influx of hedge fund money to private collectors may slow their buying rates as prices rise, but I believe they have the discipline to wait out any temporary over-priced market and storm in aggressively when the opportunistic money turns tail.

And on the bear side, wcwhiner counters with:

If there is an economic dislocation, I expect volumes to jump but margins to crater. As a result, I'm short the high-margin Portfolio Recovery Associates and long the low-margin Encore Capital (Nasdaq: ECPG  ) . That the latter is small and potential takeover bait isn't really on my radar, but Portfolio Recovery strikes me more as an acquirer than a target -- another reason to pair this trade in the direction I chose.

My takeaway? It appears that Portfolio Recovery has done a great job building its business thus far, and as long as Americans continue to liberally use credit, there should be a continued need for its services. I'd need to do some more digging (and not write about the stock for a while) to add it to my real portfolio, but this is getting a green thumb in CAPS from me.

Now it's your turn: Check out CAPS and find out what your stock of the day is.

Jokes, thoughts, insults? Bring them here.

Portfolio Recovery Associates is a Motley Fool Hidden Gems pick. A free 30-day trial to Hidden Gems can be yours by simply following this link.

Make seven picks on CAPS by April 24 and we'll send you a free copy of The Motley Fool Five-Star Report. Inside, you'll discover how to use CAPS as a research tool, and you'll receive a recommended five-star CAPS pick poised to beat the market for the next decade or more -- one you can easily translate into profits for your real-world portfolio. Click here to get started now!

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can visit Matt on the Fool's CAPS service here, or check out his blog here. The Fool's disclosure policy also goes by the Dude, his Dudeness, Duder, or el Duderino if you're not into that whole brevity thing.


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