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TLStockPicks (92.39)

PRAA: Heavy short manipulation? Or is the joke on me?

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December 15, 2009 – Comments (9) | RELATED TICKERS: PRAA

PRAA is the biggest holding in my portfolio.  So when it drops almost 15% in a week off of no direct news, I get jittery.

The debt collector posted its earnings back in October, so a large move this past week was highly unexpected.  There's a few things that makes me think this is just a wild short manipulation: 1) AACC, its closest competitor trading on the exchange, has been gaining, meaning that the sell pressure is directed at PRAA only, and not the debt collection world in general.  2) Cramdown legislation, which is one of the largest risks against PRAA, was recently bisch-slapped: http://thehill.com/homenews/senate/72197-cramdown-legislation-could-be-a-losing-battle-backers-say.  This legislation, which would've allowed bankruptcy judges to rewrite mortgages, was feared to open the floodgates for bankruptcy, which would've made it much harder for debt collectors to shake people down.  3) NO NEGATIVE NEWS!  4) While PRAA plummeted, the broader indices stayed even.  5) PRAA is already one of the most heavily shorted stocks on the market. 6) PRAA is trading below historical P/E.

Maybe it's wishful thinking, but I suspect a short squeeze will be coming soon...

9 Comments – Post Your Own

#1) On December 15, 2009 at 1:41 PM, JaysRage (89.30) wrote:

I don't know.   Maybe people realized that paying higher than 15x earnings for a company that just posted back to back years of negative earnings per share growth just isn't worth their investment.   People probably thought that the current environment of lots of debt would be good for a collection company, and they simply didn't deliver.  

Oh yeah, and besides that AACC took a 20% haircut less than a month ago, so I'm not sure what you're talking about there.  

It just seems like a rough sector to be in overall.    Not a great time to sell right after the 15% drop, but there are certainly better stocks to hang your portfolio on.   If it were me, I'd probably hang tight, hope for a squeeze to find an exit point and then find myself a better anchor to my portfolio. 

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#2) On December 15, 2009 at 2:04 PM, TLStockPicks (92.39) wrote:

Right, earnings are being hit but we're talking about 15x ttm not 15x forward (and ebitda and revenues grew last year, revenues grew this year, and the company stated on record that they expect significant earnings growth in 2010).  Consensus analyst estimates for next quarter are >5% growth yoy and there's been no analyst downgrades (actually, S&P upgraded yesterday) or price guidance lowering, so to say that people just all of the sudden realize last week that they're not going to pay 15x trailing doesn't really make sense. And, right, AACC took that haircut a month ago... not last week--again, the timing doesn't make sense. 

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#3) On December 15, 2009 at 2:19 PM, JaysRage (89.30) wrote:

Well, I'm not sure that I would trust forward earnings expectations, considering the company posted earnings misses in 2 out of the last 4 quarters and 4 out of the past 8.    If I had to guess with my limited information, I would expect analyts to adjust their forward earnings expectation downward.   Fool me once.....fool me 4 times?????   Grow by 10%, drop by 2%, drop by 3%, INCREASE BY 25%!!!????   Um, no.  

Maybe it's a pile on from the shorts and a bounce is coming, but I'd use it as an exit strategy, rather than a feeling of comfort.  Just my take.   It's not my money.   

By the way, the S&P "upgrade" came with a price target of 44, which doesn't support a price much above where it stands right now.   I don't put much stock into the official ratings, but that was negative news, not positive, FYI. 

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#4) On December 15, 2009 at 2:22 PM, JaysRage (89.30) wrote:

Oh, and if you don't think that people had advance warning of that little S&P price target issue, you're fooling yourself.  

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#5) On December 15, 2009 at 2:28 PM, TLStockPicks (92.39) wrote:

I don't see the upgrade as positive or negative... merely a reflection of pricing.  Right, their pricing was 44 even when the stock was 48 a month ago.  I guess my whole point is that even if there was overpricing on PRAA, why would the correction happen now?

Definitely seems tough to take any forward earnings projections for face value, but there's more to them than just a blind guess.  There's a better view of the debt pools now, a better sense of cramdown legislation, and a diversification towards fee-based business.  Forget how big the growth will be... it's tough for a company, mid quarter (when they release earnings reports) to say they expect "substantial" earnings growth without realizing some sort of evidence to support that during the partial quarter they're experiencing.  I mean I definitely understand your points, and on a general basis that's absolutley how I'd start off any analysis of a company, but I think you have to make assumption adjustments based on whatever comes out of the company.  Who knows.

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#6) On December 15, 2009 at 2:40 PM, JaysRage (89.30) wrote:

My closing argument.....5 misses out of 10 tells me that the management doesn't give proper guidance and consistently and methodically over-estimates earnings.    The third quarter miss was really bad.   It should have dropped like a rock at that point.   Unsubstantiated growth was built in. 

When the day is over, you have to make your own decision.   I've seen better stocks than this one take bigger dives and recover.   From my perspective, I think this one was justified. 

When push comes to shove, don't take my word for it.  You put real money on it, so I'm sure you've been following their story.  I wouldn't trust them, but you do.   So, then why are you asking here for direction? 

 

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#7) On December 15, 2009 at 3:45 PM, TLStockPicks (92.39) wrote:

I don't know if I was asking for direction as much as inviting debate.  I definitely agree with the outline of your analysis... but it's just that you don't seem to have all facts straight.  In the last 8 quarters, I see 3 misses, 3 meets, and 2 beats (and I'm talking about vs. analyst expectations, not PRAA guidance... the analysts do their own assumptions on the debt pools and writeoffs etc.).

But forget all that.. if traders and analysts and everybody else thought like you... then this reflection and subsequent drop in stock price should've happened more in the wake of the last earnings (the big miss) and not a month and a half later. 

I do appreciate your response as it helps me think through how someone else thinks through the stock.  If I disagree with your viewpoints, then it gives me more comfort that some of the drop came from similar-minded investors, and that eventually, any pricing drop that resulted from this viewpoint will (if wrong) become unsubstainable and the value is still there, and hopefully price subsequently recovers.

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#8) On January 13, 2010 at 3:53 PM, jeniferw44 (< 20) wrote:

First of all thanks a lot for the great and informative post. It was really interesting to read about the PRAA manipulation... I have to admit that reading this entry I have known many new things about it. Also I ver liked this great discussion. Thanks a lot onemore time and I will be waiting for more great articles from you. Jenifer W. from  burning calories

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#9) On March 13, 2010 at 6:32 PM, gueluck (< 20) wrote:

I would have gotten nervous, too. When there's no obvious reason pointing to anything and no information that would lead you to believe it was coming, then I think pretty much anyone would start running it through their head. Has it picked back up for you? clomiphene citrate

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