This Company Is Making Billions From Your Debt

Most successful investors figure out ways to spot opportunity before the masses figure it out. They often get in early — before the crowd catches on and sends the stock price up — and reap large benefits along the way.

And right now, the crowd is banking on a slow economic recovery. It is the message it’s getting. The mantra goes, “Be defensive and buy dividend-paying stocks from recession-resistant companies.” These are companies such as Dollar General (NYSE: DG), AutoZone (NYSE: AZO) and Kimberly-Clark (NYSE: KMB), for example.

While I like all of these companies, most people are already perfectly familiar with these ideas. The cat is well out of the bag. But for “contrarian” investors who seek out investment ideas others don’t know about or are unwilling to take a chance on, a little research can go a long way.

Well in doing a little bit of research, I discovered something quite different. In fact, it’s an idea the average investor has likely never heard before. This investment idea could possibly deliver much better returns than any blue-chip, dividend-paying stock.

Here’s the story‚Ķ

In this tough economy, consumers are having problems with paying their bills on time. As a result, credit-card debt, bankruptcies, defaults and foreclosures are at or near all-time highs. This can cripple the bottom line for financial-service companies in the lending business.

Yet there is a hero in these tough times. This company is able to leverage 20 years of servicing and 60 years of debt-collection experience to provide services and technologies to help financial companies recover assets and enhance customer relationships.

Better yet, this company has limited capital requirements, no debt and a low-cost operating model. If the economy remains sluggish or gets worse, then more companies will likely need help collecting debts.

And that’s where Altisource Portfolio Services (Nasdaq: ASPS) comes in.

The company provides services to some of the most respected organizations, including one of the nation’s largest subprime servicers, government agencies and many lenders, servicers, investors, mortgage bankers, credit unions, financial services companies and hedge funds across the country.

Take a look at Altisource’s impressive run since November 2011:

And I think the best is yet to come. Altisource provides services and technologies that span the mortgage lifecycle from origination through real estate-owned asset management, in addition to asset recovery and customer relationship management. As it relates to default management, Altisource helps with valuation of foreclosed properties, property preservation and inspection, title search services, foreclosure trustee services, default-processing services, as well as deed-in-lieu and short sales.

To be successful, Altisource focuses on margins. Its major objective is to keep more of dollar it earns in revenue. The more it keeps, the more it can fund projects and growth opportunities. Looking at Altisource Portfolio Solutions during the past 12 months:

Calculating these numbers to their five-year averages, we see gross margin peaked at 37.5% while averaging 33.2%. Its operating margin peaked at 21.3% and had a 15.8% average. Its net margin is at an all-time high while averaging 11.3%. So when we look at these numbers, we see the company’s margins are either close to or at their peak, mainly because of the high demand for Altisource’s products and services in this tough economy.

Altisource now trades at $78 along with 40-50% revenue growth and doubling earnings prospects. As asset recovery of defaulted mortgages is likely to be a hot area to be in for the next several years, Altisource should be more profitable in this type of environment.

Three reasons I like Altisource:

1. Given its ability to do well in all economic conditions, I really love Altisource’s diverse business model with debt collection, asset management and technology solutions.

2. Real estate recovery is a booming business. Altisource is a key niche player helping companies with a variety of real estate services along with superior solutions.

3. The company has a strong management team with notable and well-respected industry veterans who have published numerous articles and research papers, presented at a wide variety of industry conferences and been cited as experts in trade and consumer publications.

Risks to Consider: The stock is not particularly cheap, with a price-to-earnings (P/E) ratio of 20.3 versus 11.3 for the industry and 14.6 for the S&P 500. Additionally it’s quite volatile. Because it’s a smal- cap stock (market cap of $1.8 billion), it needs to see sharper peaks and valleys than the overall market. Additionally, because revenue growth has been so robust, expectations can get ahead of themselves. If growth slows, then the stock could see a price correction.

Action to Take –> Buy Altisource up to $82 a share. As the economy continues to be sluggish, Altisource’s profitability is likely soar. I expect this stock to top $100 by year-end, especially with the economic recovery currently stuck in the mud.