CompuCredit Corp (CCRT)

Figured I would post my response to a buddies short here, as it does a decent job of outlining the risk reward equation I see at or around today's prices. In the short term, clearly this could do anything, but over the next 2-3 years CCRT offers investors a truly head's I win, tails I don't lose much opportunity. Dhando!

Liquidation maybe, but Bankruptcy? Unlikely in my opinion. As Einhorn discussed regarding his lehman short...the debate regarding financials should revolve around 3 things

1 - Asset values
2 - Future earnings power
3 - Capital sufficiency

Assets:

With their underwriting holding up (take a look at their trust performance...both historically and today) it appears that in liquidation they would be able to realize every nickel of their $16 in book value, which is roughly a 4 bagger from current levels. No need for the business to remain a going concern for outstanding returns from this level.

Future Earnings Capabilities:

Interesting to note that not a single partner of CCRT has ever lost money. In fact, they have done quite well and continue to do so. Their inability to access funding to grow their cc origination business is due to concerns that have nothing to do with their underlying value proposition to partners.

It may be awhile before banks stop deleveraging their balance sheets, and hence provide the funding for CCRT to begin ramping up originations again. But when they do, look out.

Portfolio purchases (think PRAA), another key component of their earnings power, will certainly fuel profits going forward. Historically, when the securitization markets have shut down management has switched their focus here. The results (ROIC) of their investments in this area have been nothing short of stunning, take a look for yourself. I expect a purchase relatively soon, as management takes advantage of this current turmoil to buy quality paper at pennies on the dollar.

Mr. Market seems to have forgotten about CCRT counter cyclical earnings engines...just as they have in previous years. When he remembers I expect the shorts to cut each others throats on the way out, and the stock to begin trading at a non ludicrous level (book value at minimum).

Capital Sufficiency:

With roughly $200m on hand, as well as trusts performing on average far above what their covanents require (and long term funding secured)...CCRT should have no trouble here.

CCRT learned many years ago what happens what too much leverage can do in periods similar to today's. The business (rightfully) nearly collapsed, and excessively low leverage (as some would argue) as well as the absurd level of liquidity they have had on hand ever since is a testament to that. When management owns 40% of the stock, its not surprising they learned from their previous mistakes.

So...we have a ludicrous discount to NAV, at least $5 in earnings power when the credit markets normalize (which my guess will be awhile), a few dollars of earnings power until it does (portfolio purchases), and plenty of capital to opportunistically take advantage of today's turmoil.

This is certainly not your typical investment bank esque situation. A nuetron bomb of debt attached to a sliver of equity this is not. 33x leverage is insane, and the market is right to have done what it has done to the LEH and BSC of the world.

Mr. market surely has lost his mind here though, providing a truly incredible opportunity for patient, long term investors.

As to the recent lawsuit, the charges are baffling and unwaranted...dig a little deeper and I think you will agree. Your other points are worth delving into, but this reply is already long enough.

Lastly, I wouldn't be surprised to see CCRT close to $16 within the next year, and north of $50 (10x $5 in EPS) within 5. Assuming a more appropriate multiple for a business of this caliber, upside could turn out to be considerably higher. As always, time will tell, but one things for sure...this is not an intelligent short.

Sure anything can happen, I am no fortune teller...but intelligent investing is about betting big when the odds are in your favor, and in this case the odds on the short side of the equation are quite poor. LOL,

Ryan