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Educational post 1 : Be wary of a fancy writeup

|Includes: SLM Corporation (SLM)

This was accidently deleted on another website .good thing I found it on one of my websites

 

Notice how an internet self proclaimed stock selector... who claims to have made 8 figures investing gives you his stock of the year in 2007

 

In Love with Sallie.
Posted by: stockdocx99 (IP Logged)
Date: November 28, 2007 10:43PM


SLM Corp.: The Best Stock in America Today?
Posted by: stockdocx99 (IP Logged)
Date: November 28, 2007 09:17PM


SLM Corp. [NYSE: $37.78] As of 4 PM Nov. 28, 2007

I admit it... I'm in love with Sallie Mae. Please don't tell my wife.
Sallie Mae is my absolute #1 best buy right now for a variety of reasons. Why?

1) Student Loans are one of the most predictable growth businesses in America. In 1997 SLM's loans/share were $83.85 versus an estimated $400+ /share this year- a 377% increase in 10 years. Value Line predicts 20% compounded growth in student loans/share over the next 3 - 5 years as well.

2) Impeccable balance sheet. Value Line gives SLM an A+ financial strength rating and their highest [#1] safety ranking.

3) Very high EPS visibility. SLM shares get a 95th percentile ranking from Value Line for earnings predictability. The median estimate for 2008 is $3.20 and Value Line sees $4.50/ share EPS over the next 3 - 5 years.

4) Historically cheap valuation parameters. At today's price of $37.78 SLM trades for under 11.9X the 2008 concensus estimate of $3.20 /share in core earnings. This compares with a 10-year median P/E of 19X and represents the lowest average multiple since 1994. The absolute share price is right near 4-year lows while the revenues, book value and earnings should all hit all-time records in the year ahead.

5) Special Situation upside that is HUGE. Bank of America, JP Morgan Chase and J.C. Flowers [a private equity group] signed a deal to take SLM private at $60 /share earlier this year before the credit crunch. The P-E group is trying to weasel out of the deal now that junk bond yields have risen. They offered a compromise $50 cash plus warrants estimated to be worth $2 - 8 /SLM share but SLM directors have taken them to court to enforce the original terms - a $60 buyout or a $900 MM break-up fee. The case is fast tracked in Delaware courts and may be heard before year end.

I believe SLM's case has strong merit and that they will either get the buyout, the $0.9 Billion fee or perhaps the parties will settle on the courthouse steps. Thus, holders of Sallie Mae today could see returns of better than 50% within months if things go well.

What if they lose in court? At a normal 19 multiple of next year's EPS projections SLM shares will be $60.80 on straight fundamentals. In fact, these shares hit $54.40, $56.50, $58.30 and $58 at their peaks in each year from 2004 - 2007 without any deals [and with lower sales and earnings than currently]. When the buy-out was announced at $60 last Spring the buyers obviously expected SLM would be worth a lot more than that or they wouldn't have been bidding.

6) A good yield? Probably. As part of the buy-out agreement SLM suspended their $0.25 quarter dividend. Previous to the deal they had paid continously for years and had raised the payout every year. It was $0.17 annually in 1997 and was at a $1.00 rate this year pre-deal - a six-fold increase in 10 years. If the deal falls through they will almost certainly reinstate the dividend at even higher than the old quarterly rate. Even the old rate would equal a 2.65% yield, by far the best yield ever for SLM shares. If they receive the $900 million break-up fee they may also pay out a special one-time distribution to their shareholders.

Conclusion:

Sallie Mae is a great growth company at a non-growth valuation. It has a pristine balance sheet and a chance at a quick payoff from their signed sales agreement. With or without a sale of the whole company these shares are likely to see $55 - 65 within 12 - 18 months - a gain of 45% - 72% [not counting any reinstituted dividend payments]. Risk looks to be extremely low from near a 4 - year absolute low price quote.

This is a financial company that has absolutely nothing to do with sub-prime paper, mortgages or housing, yet it is trading like banks and mortgage firms with lots of risk.

Think 'the market' is telling you a deal won't get done? Remember Dow Jones. Right before the DJ - Murdock deal was accepted at $60 cash you could have bought DJ at $47 - 48 as many thought the family controlled shares wouldn't sell. Unlike DJ, SLM has tremendous value even without a buyout, yet like DJ you could see an immediate substantial return with a court victory that leads to the sale at $60 [or a negotiated $54 - 58] or the receipt of the agreed upon break-up fee

 

Each day Iam going to give you another example of a writeup which sounds good but the author's judgement is just plain wrong

 

This same person picked AIG among others in 2008 at the bargain price of 45.

 

Please read and reread this and next time you read about an authors stock of the year .remember this post and be wary.