Debt Collectors Reap Rewards on Wall Street

The mountains of debt that consumers have piled up are a good thing - if you get paid to collect it.

Shares of several midsize companies that specialize in collecting old consumer debt are climbing, as companies, hospitals and others increasingly farm out the job of collecting it all. NCO Group Inc., Encore Capital Group Inc., Portfolio Recovery Associates Inc. and Asset Acceptance Capital Corp. have seen their shares rise between 8 percent and 31 percent this year, as the overall market has barely budged.

But even though the lucrative business is attracting more competition, forcing companies to pay somewhat more to buy portfolios of bad debt, some investors argue that there are more gains ahead.

For one thing, these companies are acquiring smaller, local competitors, and using their increased bulk to do a better job of pressuring debtors and pinpointing accounts most likely to pay up. And these stocks aren't yet expensive, despite their run-ups, thanks to expectations for impressive earnings growth.

At the same time, the rise in debt is showing no signs of reversing. Household-sector debt is up to about $9.7 trillion, mostly from mortgages. That is up 10 percent in the past year, and it is growing faster than personal income, suggesting that more bad bills will be coming due. But reasonable job and income growth, and still-low interest rates, make it easier for some consumers to pay off their bad debts.

"When you get into a cyclical recovery, instead of taking three months for people to pay debts they take two months, driving leverage in the business," says Jeff Petherick, a portfolio manager at Northpointe Capital LLC in Troy, N.Y., one of the largest of holders of NCO shares. "We should see earnings improve nicely."

For this complete story, please visit Debt Collectors Reap Rewards on Wall Street.