Pre-Paid Legal Services: Don't Let the Low Growth Rate Fool You

Pre-Paid Legal Services (PPD) announced excellent earnings yesterday. Don’t let the low growth rate fool you; their share buy backs are pushing up earnings and return on shareholder equity. By using the way Buffett approaches certain holdings, they make a slow and steady growth business increase shareholders' value over time. They are making more money buying their own shares rather than investing in other business ventures to increase revenue. Since their business model doesn’t require large amounts of capital, their return on equity is very high, making for an attractive business model.

To limit the risk in this investment you could buy a Jan.08 Call with a strike of 70 for around $5-6. The bid is at the time of this article $3.90 and the ask $8.80. The last trade was $5.50. This effectively limits your entire downside to $550 per option. I bought a call last month for $3.2 which is now worth $5.5 for a gain of 71% in a little over a month. If the stock market and Pre-Paid Legal continue to do well you could see an appreciation of 100% on your option by expiration. This is not a recommendation for you to buy but only an example of an option and stock that I find reasonably valued. As always invest wisely by doing your own research.

Disclosure: Author has long positions in Pre-Paid Legal Services.

PPD 1-yr chart