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Financial "Extremes"...

01/28/2005 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen seeks opportunity across all sectors of the market and is equally comfortable in the small- and large-cap arenas. Here, he looks at two financial firms at both extremes. One is a large-cap play on investment banking, and the other, a little known play on "credit card blues."

"Investment banking will be a major profit center in 2005. My favorite investment bank right now is Goldman Sachs (GS NYSE), the fastest growing investment banking firm in the world. This is an exceptional value. Most important, it recently obtained exclusive rights from China to take new Chinese companies public. This could be a hugely profitable opportunity for Goldman Sachs. We’d note that Goldman is also the underwriter of the hot new issue Las Vegas Sands, which is the owner of Bally’s, Paris, and the Venetian hotels.

"The stock has not performed as well as other investment banks, probably because it pays such a small dividend, just a dollar a year, or less than 1%. But given that its earnings per share exceeds $8, it has plenty of room to pay more, and I would not be surprised to see GS raise its dividend and split its stock. Selling at only 13 times earnings, buy Goldman, preferably below $110, with a protective stop at $88.

"We also recommend Portfolio Recovery Associates (PRAA NASDAQ), as a way to benefit from 'credit card blues.' The company is benefiting from the overspending habits of American credit card users. This is a company that specializes in recovering defaulted credit card debt. Because of the Fed’s easy money policy, more and more credit card users are falling behind in their payments and are being hit with high interest-rate fees and penalties.

"The result? Delinquent debt is reaching astronomical levels. Excluding home mortgages, the average personal consumer debt is over $18,600 per household, up 41% from 1998. Credit card companies and merchants with revolving cards try to collect on non-paying debtors, but after a while, they give up and charge off debt to collection agencies and legal firms who buy this debt for pennies on the dollar and then attempt to collect. The collection business can be highly lucrative to private firms. PRAA has been very successful in its recovery methods, and the stock should continue to rise."

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