Here’s why I bought Asta Funding – B. Ruchert-Dixon (ASFI)

Model manager Brendan Ruchert-Dixon runs Covestor’s Alpha Trapper model, which follows a long-short strategy, aiming for balanced growth in the long portion while using short positions in poorly-structured ETFs to both hedge risk and aim for extra returns.

Brendan recently added Asta Funding, inc (NASDAQ: ASFI) to the model. ASFI is engaged in the business of purchasing, and managing for its own account portfolios of charged-off receivables. We asked Brendan to share his reason for purchasing ASFI. His response follows:


As a general guideline, I stick to ETFs and do not invest individual company stocks very often. In most cases I find it difficult to evaluate what the assets and future cash flows of a company really are, leaving me in no position to outguess other investors regarding the company’s value. Occasionally though, I will break my rule when I see a company that I can evaluate and find a glaring mismatch in valuation.

Asta Funding (ASFI) is one such example.  It is a company that buys distressed (difficult-to-collect) debt from other companies for pennies on the dollar. They have a fairly straightforward business model whereby they spend money to buy debt and earn revenue when they collect the debt. Other expenses are fairly low compared to the amounts changing hands when they buy and collect.

Up to 2007 or so, the company ran a very profitable operation, and they were valued as such. But toward their peak they made one large mistake – they made a large purchase (the “Great Seneca” portfolio), spending $300 million of borrowed money for a portfolio that they have since had great trouble collecting on – in part because they overpaid for it, and in part because the economy went sour soon after the purchase. They had to take repeated large impairments to the value of this portfolio, and their liquidity was damaged so much by this that the stock lost most of its value from spring 2007 to early 2009.

However, ever since that mistake, the company has reformed, becoming very conservative with both its accounting methods and its purchase decisions. They are profitable and they have a book value over $11, much higher than the current $7+ stock price (as of 5/29/11). In fact, as of the end of March 2011 they had more the $6 per share in cash alone. They also have many assets that they value at $0, but still collect substantial revenues from.

Moreover, the company benefits from one smart decision that they made during the ill-fated Seneca purchase: It was a non-recourse loan. If they fail to repay it, the bank can only recover the portfolio itself plus a small amount of cash. The rest of Asta’s business is off-limits and essentially debt free.

As it stands, the remaining debt on the Seneca portfolio is about a quarter of what it originally was, and even if Asta were to default on it (which they did not need to do even in the worst of times a couple years ago), they would lose less than a dollar from their book value. As such, I see no reason to value ASFI any lower than $10 at this point, and potential for much higher than that if more serious analysts, investors, or acquisition-minded competitors take a serious look at the company.


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