Subprime Loans, Greek Banks, and Venezuelan Oil

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The web is littered with lists, boasts from every corner, each claiming to be the penultimate collection of tips, tricks, lessons, and laws. Smart investment is driven by experience and data, and you often have to navigate through the digital debris to find good advice. But mistakes are just as instructive. Smart people are never entirely immune to bad judgment. So we are offering a new monthly series—My Best, My Worst, My Next—which offers three personal anecdotes from world-class investors. We hope to guide you towards success, warn you away from failure, and provide an advanced peek at the future.

Available by subscription only, Barron's Daily Stock Alert has beaten the Dow Jones U.S. Total Stock Market Index benchmark by 10 percentage points over its three years of existence. The executive editor of Barron's is veteran financial journalist Fleming Meeks, who previously edited SmartMoney magazine.

MY BEST: Hedging Your Bets

Meeks says he had no hesitation about recommending Credit Acceptance Corp. (CACC), a Southfield, Mich.-based subprime auto lender, back in 2009, when nobody had anything good to say about subprime. The company traded at $17.

His reasoning: Credit Acceptance is an auto-related, not a housing-related, stock, and the company's business model and experience have been proven over some 40 years.  "While others get greedy, at Credit Acceptance they don't change their standards of lending," says Meeks.

Credit Acceptance makes loans to cash-strapped car buyers, advancing a portion of the purchase price. It leaves it to the dealer to determine how much the buyer has to put down and how much the dealer will lend on its own. As the loan is paid back, Credit Acceptance recoups its entire advance before the dealer collects a cent.

The company's business stayed on track even as auto sales fell off a cliff during the economic downturn, because its customers buy cars out of necessity, as transportation or for work.

Meeks has recommended Credit Acceptance seven times over three years, more than any other investment, with no regrets. There were 30 publicly traded subprime auto lenders in the 1990s, and now Credit Acceptance is the only game in town. The stock reached a high of $86 this summer, five times higher than when Meeks first recommended it three years ago.

"It's been working out better than expected, and I have reason to believe it will continue," says Meeks.

MY WORST: A Greek Tragedy

Hard as it is to believe today, National Bank of Greece (NBG) looked like a good buy to Meeks in May of 2008, at $11 a share, or 10 times 2008 earnings estimates, and paying a 3.9% dividend. Earnings per share were expected to rise 31% in 2008, after a 43% jump in 2007.

"The entire global banking sector has been slaughtered over the last year, and National Bank of Greece...is one of the innocent bystanders," Meeks wrote in Barron's Daily Stock Alert that May.

His reasoning was right. National Bank of Greece had no subprime exposure, and it had excess capital. The bank was building itself into a southeast European banking powerhouse by expanding aggressively to the underserved markets of Romania, Bulgaria and Serbia as well as Turkey.

Everybody knows what happened next. National Bank of Greece is now trading at $1. "We didn't do enough work on Greece, the country," admits Meeks.  

MY NEXT: Trusting Hugo?

Barron's Daily Stock Alert looks for special situations—gems among smaller, less-covered and less well-known companies. Meeks and his two reporters use their financial journalism skills to tell investors about stocks like Harvest Natural Resources (HNR), a Houston-based independent oil exploration and production company.

Harvest Natural Resources recently traded at $13, but Meeks believes that the company's stake in Petrodelta alone, which controls concessions covering six oil wells in Venezuela, is worth some $20 a share. Venezuela is the rub here, as investors are jittery that president Hugo Chavez may expropriate the Americans. Meeks bets that common sense will prevail, since Chavez needs outside know-how to help him generate oil revenues.  

Historically, Harvest Natural Resources has sold its leases on oil fields, and the company's website states that the company is in "the business of disposition of oil and natural gas properties." Meeks thinks Harvest Natural will sell its Venezuela interests to the Chinese, who have a cozy relationship with Chavez, or to Russians. Another exotic upside is the recent find of oil in Gabon, which Meeks figures to be worth another $5 a share.

"Energy is an attractive sector, and Harvest Natural Resources is a special situation within an attractive sector," says Meeks.   



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CACC , HNR , NBG

Kasia Moreno


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