Two Stocks for a Real Recovery

04/30/2009 1:00 pm EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Hedge Fund Trader and Turnaround Trader, says he thinks the market has hit bottom, and he likes two stocks for an eventual—if volatile—recovery.

Wall Street is debating the huge run-up in the Dow Jones Industrial Average. Is it the bottom, or a dead-cat bounce? I’m inclined to think it’s real, although the recovery will be volatile. The government is pulling out all the stops to stimulate the economy, and during the first year of a new presidential cycle, the market almost is always up. So, I remain bullish in 2009.

If there are signs of economic improvement, one of the beneficiaries will be Portfolio Recovery Services (Nasdaq: PRAA), the largest publicly held debt collection business in the country.

Based in Norfolk, Va., PRAA purchases and manages portfolios of defaulted consumer receivables and provides a broad range of accounts receivable management services. If you fall behind on your Visa, MasterCard, or other bill, you might get a call from Portfolio Recovery Services.

Needless to say, the debt collection business has been booming in the past year. In fact, revenues have already revved up 17% to $263 million in the past 12 months, with net earnings exceeding $45 million.

With a profit margin of 17%, the company has been discovered lately and the stock price has almost doubled [from its March low]. Still, I think it has a lot more to go, especially since it is selling at [less than ten] times next year’s earnings. Remember, it was selling for [nearly] twice what the price is today. (It closed below $35 Wednesday—Editor.)

Moreover, PRAA will benefit if the economy recovers, because when people go back to work, more will pay off their credit cards and other loans.

Finally, short sellers are hanging around in hopes of another collapse, but they could be squeezed and forced to pay higher prices.  

Let’s buy PRAA at market and set a protective stop of $30. For those willing to take greater risks, consider buying the January 2010 $40 calls (YCZAH).

Interactive Brokers (Nasdaq: IBKR), a 30-year-old market maker and brokerage house based in Greenwich, Conn., has trading platforms on some 70 exchanges around the world, and is one of the world’s leading market makers for options. And the options market is growing by leaps and bounds.  

Interactive offers super-fast executions and low prices. It is conservatively managed, and does well in times of high volatility. When markets become more volatile—likely in today’s uncertain crisis conditions—net income increases.

In fact, earnings were up 8% to $93 million in the most recent quarter on revenues of $1.85 billion (also up 8%). With high operating margins, return on equity is an outstanding 22.8%.

Interactive Brokers is selling for only seven times earnings, and there’s been some insider buying lately. Let’s join in by buying Interactive today, and set a protective stop of $13 a share. (It closed below $15 Wednesday—Editor.)

For those willing to take a bigger gamble, consider buying the September 2009 $20 calls (QBOID).  

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