Stocks of Debt Buyers Surge as Investors Scramble to Reduce their Losses

While the broader stock market enjoyed a good day Monday, the publicly traded companies in the accounts receivable management industry saw their stock prices spike sharply, with two enjoying a double-digit percentage rise.

Four of the public ARM companies – Asset Acceptance, Asta Funding, Encore Capital Group, and Portfolio Recovery Associates – were up at least twice as high as the Dow Jones Industrial Average on Monday, which gained 187 points or 1.5 percent.

Asta Funding (Nasdaq: ASFI), based in Englewood Cliffs, N.J., was the biggest mover of the bunch with share prices up 15 percent for the day. Norfolk, Va.-based Portfolio Recovery Associates (Nasdaq: PRAA) was right behind, clocking an 11 percent increase for the day. Warren, Mich.-based Asset Acceptance Capital Corp. (Nasdaq: AACC) was up 8.5 percent, while San Diego-based Encore Capital Group (Nasdaq: ECPG) was up 4 percent.

The spike was a welcome shift in a recent trend for Asset Acceptance’s shares which had lost around 25 percent of their value since December. Likewise, Portfolio Recovery had seen its shares fall about 20 percent since last Fall.

Audrey Snell, an analyst with investment bank and equity research firm Kaufman Bros., told insideARM that the rise in prices in the ARM sector is probably due to investors covering short positions. “A lot of people shorted the ARM sector heavily at the end of Q4 under the assumption that consumers would not be able to pay their debts,” said Snell. Snell covers Asta and Portfolio Recovery for Kaufman.

But recent events — positive data on home sales and the Federal Reserve’s coordinated effort to shore up liquidity in the financial sector through the Bear Sterns/JPMorgan deal – point to an economy that is, while sluggish, not slipping into a deep recession. Snell said this has many shorts reconsidering their positions. 

“If you’re short on financials, you’re tacitly betting against the Fed,” said Snell. “That’s not a good place to be when [the Fed] decides to get aggressive.”

Despite the run-up in prices, Snell still has “hold” ratings on both Asta and Portfolio Recovery’s shares. She explained that she isn’t ready to say that the economy definitely won’t slip into a recession this year.

Snell thinks that investors covering short positions could drive ARM stock prices even higher in the short-term. She said that the first quarter of 2008 should show strong financial performance for all of the players as the first quarter is typically a strong quarter for collections with consumers holding tax refund checks in their hands. Second quarter performance will also be helped by the economic stimulus plan checks, due to hit consumers in early summer.