Everyone Hates Sallie Mae

| About: SLM Corporation (SLM)

Whenever I head back to New York for a funeral, as it becomes ever more clear to me that I'm part of the next generation in line, I glance to my left and see the Sallie Mae (NYSE:SLM) headquarters in Delaware.

Not that long ago it was thought to be the next of the quasi-governmental debt managing organizations to be headed for extinction.

It can't be a good sign that its headquarters sits within walking distance of a strip mall that until very, very recently still contained Borders (OTC:BGPIQ) and CompUSA signage. Examples of business swamped by debt and unable to cope with a changing competitive paradigm. The fact that they had bricks and mortar didn't help matters.

Sallie Mae's headquarters doesn't seem terribly large from the view that I'm able to get, but then how much space do you really need when everything you do can be stored in the ether on someone's server farm?

Not very long ago there was lots of fear and trepidation that Sallie Mae would cease to exist. The talk heated up as the new Obama administration was ready to take the Washington reins. The reasoning seemed solid. The federal government didn't need the services offered by Sallie Mae and could more efficiently get the needed tuition loan money into the hands of students than could the private sector.

There must be some data to support that contention somewhere. Fortunately, Internet search engines aren't government run, at least not in the United States.

In a recent article, "Seeking Mediocrity" I mentioned that I had recently purchased shares of Sallie Mae, along with a number of other stocks with newly found account cash from the assignment of Barclays Volatility ETN (NYSEARCA:VXX) calls and the expiration of its put contracts.

I used that cash, which came from having a hedge to protect against a market drop to help pick up some stock bargains. At least I hope their purchase prices were bargains. Time will tell.

Sallie Mae was among them and was another long time resident of what I have called my "Old Reliables." Those are the stocks that I keep going back to over and over again. Sallie Mae has been on that list since June 2009.

A reader however commented on the Sallie Mae purchase:

"Not sure can generate shareholder value. 5B in cash, 180B in debt, pays top 5 executives 11M -- though the CEO is not selling shares, his 3.6M salary suffices, I suppose.

I guess since they're based out of Delaware that saves ... and the reason why Net Income rises while Revenue decreases, as was the case from 10' to 11' ... is because the students are paying a higher rate on their loans than is paying on their debt ...

Still ... $180B in debt ... 5B in cash ... it's like 'who wants to own our debt ...?"

The reader's comments about Sallie Mae were absolutely cogent and surely correct observations. At least I think. I'm the kind that will just take his word for it, but ignore the very same words. I'm stubborn once I've become accustomed to the things that I like. It's hard to dislodge the biases formed when you've been treated well and Sallie Mae has treated me well. Although it is possible, otherwise, Androcles would never have stood a chance with that lion. But I'm a bit more hard headed.

The mention of Sallie Mae and the other stocks was just meant to be illustrative of the added bonus that may occur when the individual investor protects their holdings, rather than following the lemming path recently espoused by Steven Rattner and John Bogle. The article was more of a rant, with Sallie Mae just being casually mentioned.

For me, Sallie Mae is like many other companies whose shares I own or trade. In this case, I do know what Sallie Mae's fundamental business is, but what I don't know is anything about their "fundamentals."

Those are the sort of things that Steven Rattner and John Bogle say that the individual investor isn't suited to understand. I don't know about that, I just don't find it particularly relevant for my purposes.

I have been trading in Sallie Mae since June 2009. For purposes of comparing a single stock to the overall market that particular time frame presents a tall order, as the market lows had been reached barely three months earlier and was in the early stages of what had become a 100% gain just recently.

Sallie Mae, however, was more than up for that match, having well outperformed the S&P.

(Click to enlarge)

However, when one starts to play the games that mutual funds used to so well, changing the time frame can give a very different impression. Looking at the most recent 1 year returns from May 24, 2011 to May 32, 2012, the story is quite different.

In that time the S&P 500 lost 0.1% while Sallie Mae shares actually plunged 18.5%.

That is, of course, unless you used the individual investor's best friend; the covered call. At least it's the best friend of those, like me, who really don't know how to pick the right stock at the right time. It's what I like to call "Being Bogle Challenged."

By actively selling covered calls, sometimes in the money and sometimes near the money, what could have been an abysmal Sallie Mae position turned out to be acceptable, although certainly not spectacular.

But given the choice between following the advice of those that suggest the individual investor stick only to index funds, I'd rather take the 2.4% gain than the loss. (See trade history)

My current lots of Sallie Mae aren't included in the results. They were purchased just days ago at an average price of $13.02. In return for selling the $13 call, I received a premium of $0.44, netting a 3.2% ROI if assigned 4 weeks later.

Never during any of the time I've owned shares have I ever bothered to look at fundamentals, even ignoring the fear that Sallie Mae was going to disappear when the Obama Administration came to town. In fact, since then they've even added a small dividend.

That's where my knowledge ends. The cash/debt ratio is well known. You'd have to think that it is accounted for in the stock price. If anything, the option premiums on SLM are reflecting less volatility, as I used to be able to get 4+% on the near money, whereas it is now in the 3% range.

What I do know about Sallie Mae is that it is reviled.

When I first got started with Twitter, I tried to learn about the ins and outs of communicating with like minded people about stocks. At that point I hadn't heard about social media based stock market sites. Trying to find a kindred soul, I used "Sallie Mae" as a search term.

Bad idea as I had recounted about some 8 months previously (Point your Crosshairs to the Right). With many now saying that our next debt crisis is that of student loans, Sallie Mae will be the easy target. Fortunately, it may be a little too late in the current election cycle for it to become a major policy issue, but it could easily pop up, as there have already been related political maneuverings in Congress.

Of course, if those Borders and CompUSA-like jobs don't return, then countless recent college graduates will remain unemployed. Even under-employment in the retail sector for them is a better way to be able to pay back those student loans than the current alternatives.

But until something horrific comes down the road, Sallie Mae may have been Freddie (OTCQB:FMCC) and Fannie's (OTCQB:FNMA) ugly sibling, but everything still looks beautiful in green.

Disclosure: I am long SLM.

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