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Got $100? Here's 1 Great Stock To Buy and Hold

By Jennifer Saibil – Jan 13, 2022 at 6:40AM

Key Points

  • Nelnet's core business is student-loan financing, but it has a large array of businesses and services.
  • Nelnet had a super 2021 and the future looks good.
  • This is an excellent value stock to add to your portfolio.

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You may not have heard of this company, but it's big, and it's betting bigger.

Not every good investment is an exciting, disruptive company that's changing the world. Some of the best investments are well-run companies making life a little easier for their customers and increasing sales along the way. Student-loan processor Nelnet (NNI -0.49%) fits into the second category. It's one of the best-kept secrets on Wall Street, with a market cap of only $3.6 billion, even as it gained 33% over the past year. Shares still trade just below $100, and if you have that available for investing after paying your bills and saving for an emergency fund, you should consider buying a share.

More than student loans

Nelnet is known (if it's known at all) for its huge student-loan book, although it operates several businesses that all together make it a financial-services heavyweight. It doesn't originate new loans at this point, though it does carry almost $20 billion of loans on its balance sheet and it expects $2.2 billion in loan repayments over the next few years. So it is relying on its other businesses to provide new avenues for growth. 

A couple sitting at a table and looking at a tablet.

Image source: Getty Images.

Nelnet is more like a conglomerate than a single company, running several different businesses, some of which feed off of each other and others that are distinct. It operates four main divisions: asset generation and management (AGM), which is mostly its student-loan book but also its investment branch; loan servicing and systems (Nelnet diversified services, or NDS), which offers various services related to loan origination and technology; education-technology services and payment processing (Nelnet business services, or NBS), which offers a wide array of services such as payment solutions and management solutions for educational institutions; and Nelnet bank (Nelnet financial service, or NFS). It also has an "other" segment that includes Allo, its communications service that serves Nebraska and Colorado, and a cyber fusion center, which focuses on cybersecurity. The company makes money through interest income in the AGM segment and Nelnet bank and fee-based revenue through the other segments.

The company is leaning into fintech (financial technology), using technology to power its interconnected systems and provide an enhanced customer experience. The bank is a continuum of the company's services, providing digital-banking services and offering solutions such as student-debt consolidation. 

How is Nelnet doing?

The $20 billion in student loans on Nelnet's books is guaranteed by the federal government, so it's really just sitting there making money for the company. Nelnet reported $83.1 million in net interest income from the AGM segment in the third quarter, versus $80.2 million in the same quarter a year earlier.

As of the end of the third quarter, Nelnet was servicing $514 billion of government-owned student debt for more than 15.8 million borrowers. Revenue for the loan-servicing segment (NDS) was $112 million, a slight decrease year over year, and the segment posted a net loss related to the pandemic. Revenue from the NBS segment increased 15% year over year to $85.3 million. Nelnet bank, which was launched in 2020, had a $192 million loan portfolio. Earnings per share in the third quarter were $1.38, down year over year as the company dealt with coronavirus-related issues, such as debt deferment. The company obviously has a vast market and varied growth pathways, and it's adding services, such as the relatively new Nelnet bank.

Investors loved Nelnet last year, but it's fallen a bit so far in 2022. Even at a price of $95, the shares trade at only 7.5 times trailing 12-month earnings, which is cheap even as far as financial-services stocks go. Its three-year share price gains are roughly on par with the S&P 500:

NNI Chart

NNI data by YCharts.

The company also pays a dividend, which yields a below-average 0.94%, though that's not necessarily a reason to avoid the stock. More important for investors is that Nelnet is a strong, growing company that can add great value to a diversified portfolio.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool owns and recommends Nelnet. The Motley Fool has a disclosure policy.

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