Investor Intelligence

news and notes

2006-01-24T18:27:00.000-06:00

Int'l Game Tech. (IGT) has been on fire of late. Co. reported very strong quarterly #s. Particularly impressive were gains in ARPU and non-machine sales. Here's the Mark Sellers interview where he discusses IGT {Note I am long IGT}

JP Morgan has been pushing Tweeter (TWTR) hard prior to its earnings report tommorrow. Stock could move $1 either way on a beat or a miss. I'm hoping for a beat and a run into the $7's to short into. Also, something on TWTR that I believe I failed to mention earlier is that the auditors noted weaknesses in financial controls in their most recent 10k.

My favorite confectionary co. is coming back to me. Wrigley is down to about $64 now from $70ish a few months ago. Another 10% move lower and I'll be very interested.

A new Greenblatt idea: IMS Health (RX) is a medical information service provider. Here's a presentation to get you started. Co. will report Q4 and FY05 on 1/31.

A new short idea: Cosi Restaurants (COSI): Co. has very aggressive expansion plans and very poor expense control. Take a look.

my newest position -- Overhill Farms (OFI)

2006-01-21T09:36:00.000-06:00

OFI is a stock that came across my radar screen via VIC. Before I begin, note that OFI is a microcap stock and my track record with stocks in this area is poor. But these mistakes have been in the sexy sectors -- biotech, medtech, any tech. One difference here is that OFI is decidedly unsexy. OFI manufactures frozen food products (entrees, meal components, soups, sauces, poultry,meat, fish). The current share price is $3.66, market cap of $55 million. FY05 sales were $162.6 million.

Here's what I like about OFI:

Sales were up 21.4% in 2005

Income statement ratios moving in the right direction (05 vs. 04)--GM% at 12.2% vs. 10.7%, SGA% at 4.8% vs. 6.0%, Op margin 7.3% vs. 4.7%.

Panda Restaurants and Jenny Craig are OFI's two largest customers (combined 50% of business). Both have been growing smartly.

OFI's move into a new maufacturing facility seems to have been behind the op. expense improvement at the co. OFI still has excess capacity at that plant to "grow into."

Possibility of re-financing of debt--OFI has a 10/31/06 note that carries an interest rate of 13.5%. Re-financing that debt (maybe to the 7% range) would make a big dent in the int. expense that shows up on the income statement.

OFI is pretty cheap--They earned $0.24 in 2005 (15x trailing) and I think that number can move materially higher based on the discussion above--sales growth at the 2 large clients, op expense improvements, debt refinancing.

OFI insiders hold about 20% of the shares.

Risks:

Client concentration (Panda and Jenny Craig). Also airlines are a big piece of the pie. This is a bit disconcerting due to many airlines deciding to cut back on in-flight meals. However, OFI has managed to keep this part of the business around $30 million in the past 3 years.

Not much volume--20k or 30k per day

The re-financing doesn't happen.

OFI had hired Piper Jaffrey to explore alternatives for the co. The risk here is that Piper's recommendation, if followed, might be suboptimal to the shareholders.

The Holy Grail of Value Investing

2006-01-21T09:32:00.000-06:00

What is it? I don't know. Where is it? Maybe it's in Seth Klarman's "Margin of Safety." No, I decided not to fork over the $700 for this mysterious tome; my library is going to snag me a copy. I'll let you know if I come across any nuggets. I'm also just getting into Thorton O'Glove's "Quality of Earnings." So far, so good.

Get thee to the VIC!

2006-01-18T21:03:00.000-06:00

VIC stands for Value Investor's Club. As I've mentioned before, upon registration, guests can access VIC member posts on a 45 day delayed basis. If you're searching for some unique stock ideas, I highly recommend signing up (it's free, just do it). Ideas are very well researched and professionally presented. As a matter of fact, yesterday I initiated a position in a co. I initially read about on VIC. The company is Overhill Farms (OFI). A more detailed write-up on OFI will follow, but for now, here are some other VIC ideas that might make some sense:

Discovery Holdings (DISCA) is a recent spin-off from Liberty Media. It's main asset is a 50% stake in Discovery Communications (TLC, Discovery Channel, Travel Channel, Animal Planet). These are some of the most popular stations that are not yet part of a media conglomerate (e.g. Time Warner). Besides VIC, the armchair analyst has a nice write-up on DISCA.

Femsa is another co. that I'm interested in (FMX). The co. has 3 units (a massive and very profitable Coca Cola bottling unit, a brewery unit and also a convenience store unit). Here's a corporate presentation to get you started.

the Bear Case on Tweeter (TWTR)

2006-01-16T18:40:00.000-06:00

I have previously mentioned Circuit City (CC) as a short opportunity around $25 but I think Tweeter (TWTR), in the $6's is a more compelling idea with a medium term (6m-2yr.) time frame in mind. Tweeter is a consumer electronics retailer that caters to the mid-high end shopper. Market cap of ~$150mm, FY05 sales of $795mm.

Before we get to the bear case, what do longs hang their hats on?

Gross Margins have increased nicely over the past 3 FY's (34.3% in '03, 38.9% in '04, 39.5% in '05). GM improvement is due in part to a greater focus on installation services and parts & accessory sales.

Q4 of FY05 saw SSS up 10%

Recent positive analyst comments -- JPM sees SSS gains up mid-upper single digits in 2006 and expenses coming under control. The analyst also notes that TWTR is cheap compared to Best Buy or CC on a price/sales basis. Finally, JPM sees the HDTV upgrade cycle as a big benefit to TWTR.

Before I start with the bear case, note that my belief is that the market in general (and specifically certain retailers) will come under pressure in 2006. I think TWTR will suffer from a gradual slowdown in the U.S. consumer.

Bear case:

GM% has been increasing nicely, but so are selling expenses and G&A. Selling expenses have moved up from 30.1% in 2003 to 34.1% in 2004 to 36.5% in 2005 and G&A has moved up from 6.0% in 2003 to 6.7% in 2004 to 6.8% in 2005. I think part of the selling expense ratio deterioration stems from the increased focus on home services/installation. Sure this provides a GM lift, but TWTR pays for it in selling expenses. On the G&A side, the deterioration here might be due to having these corportate expenses spread over fewer stores--which brings us to the next point....

Stores are closing. 176 were open at FY end 2004 and 159 were open at FY end 2005 (net 17 closed). Because of this, I don't put that much weight on the JPM comment that SSS growth should be ok next year. It sure as hell better be! You just removed 17 dumpy stores from the store base.

Weak balance sheet--TWTR had $1.3mm in cash and $39.2mm in working capital at the end of FY05. Of the co's credit facility ($90mm in revolving credit loans and $13mm in term loans), all but $15.3mm has been drawn down. Int. expense has hurt and will continue to hurt the inc. st.

Even if you don't include the restructuring charge from 2005 ($16.5mm), operating loss still widened to $30.6mm from $20.9mm the year before. OCF flow for the year was minus $26.7mm.

Couple of Red Flags:

Accounts Rec. were $17.8mm in 2004 vs. $28.2mm in 2005 (up 58%) while sales were up 4%.

Sale-Leaseback transaction -- This type of transaction involves a co. selling an asset to another party and then leasing that asset from that party. So it enables the seller to get an asset off the b/s and generate some cash up front. For TWTR to make such a move makes sense; they're hardly flush with cash. So TWTR decided to enter into a sales-leaseback transaction with its Rhode Island store with (drumroll) the Chairman of the Board of TWTR! The co. mentions in the footnotes that they had independent valuations of the property. But I still have an uneasy feeling here. Did TWTR do all they could to maximize the value they rec'd for this property?

Store closing arrangement--I think this stinks too. As mentioned earlier, TWTR closed several stores in FY05. So the co. had to get out of leases, restructure leases, etc. And who did TWTR turn to for these RE services? Gordon Brothers. And who runs Gordon Brothers? The Chairman of the Board's brother. Super. Longs can't like that.

It's difficult to come up with a price target for TWTR because all of the earning's based metrics don't apply. My guess, based on strong competition from BBY/CC/WMT and even SHLD, a weakened U.S. consumer, a faltering b/s and a bloated expense structure is the $3 range. I would not be surprised to see shares in that vicinity by the end of 2007.

{Note that I have no current position in TWTR or Best Buy or CC}

PSPT on a roll

2006-01-14T12:02:00.000-06:00

PeopleSupport (PSPT) has been on a tear of late. The analysts all have good things to say (see here, here, here and here) about the Philippines based outsourcer. Plus the co. recently made a smart acquisition of a transcription co. to better utilize their new corporate facility.

{Note that I am long shares of PSPT}

IPO's I'm following

2006-01-14T11:51:00.000-06:00

If you have some time on your hands, check out these two S1's from traffic.com and Chipotle Mexican Grill. I wouldn't be surprised if Chipotle, in particular, spikes 20% on day 1.

Two picks from Greenblatt's Magic Formula

2006-01-14T11:33:00.000-06:00

As I mentioned before, I'm not willing to chuck all the research that I do to follow Mr. Greenblatt into the promised land. But I'm not willing to dismiss his high ROC/high earnings yield formula, either. Here are two stocks that I find interesting that pop up at magicformulainvesting.com

Holly (HOC) is an independent refiner ($2B market cap). It processes heavy crude and has had very strong spreads in recent years. Basically, the bet here is that spreads will stay wide and HOC might eventually be taken over by a giant like VLO. Here's a presentation if you're interested.

Hewitt Associates (HEW) is a business services co., another midcap ($3B). What intrigues me here is that HEW is the leader in HR BPO, that is Human Resources Business Process Outsourcing. HR BPO is an area that is expected to grow smartly over the next five years. Just think about all of the administrative tasks that your HR dept performs at work. Could someone else perform those tasks better and at lower cost? I think so. HEW grew its HR BPO business significantly through it's acquisition about 1.5 years ago of Exult. Right now, HEW's business is roughly 2/3 HR BPO and 1/3 consulting services. The problem is that the HR BPO unit is growing faster than consulting and carries lower margins (results in lowering of corporate margins). HEW management thinks this will be alleviated as the HR BPO long-term contracts mature. The stock hasn't really done anything for years, but based on HR BPO demand and increasing (hopefully) margins here, HEW is worth a look. I'm looking for sub $25.

Monetary Myopia

2006-01-14T11:28:00.000-06:00

The Economist takes el jefe to task.

"The deepest flaw in Mr Greenspan's policy towards asset prices is its asymmetry. If the Fed always cuts interest rates when asset prices tumble, but never raises them when they soar, then investors will be encouraged to take bigger risks. That makes bubbles more likely. The Fed was right to ease when the stockmarket bubble burst, to avoid repeating the Bank of Japan's mistake in the 1990s. But such “mopping up” should be a last resort, not a concerted strategy that cushions the bursting of one bubble by inflating another—since 2002, in housing."

Bull vs. Bear (Faber vs. Gave)

2006-01-14T11:23:00.000-06:00

Financial Sense has put up an interesting discussion between Dr. Doom and Louis Vincent Gave on the outlook for 2006 and beyond. As you might expect, their disagreements center on the health of the U.S. economy.

Paul Kasriel puts out his latest

2006-01-14T11:20:00.000-06:00

Here is the January Economic Outlook, "Mission Accomplished.

Paul thinks we get to 4.5% FFR on 1/31 and the Bernanke cuts will begin in September.

3 Commentaries

2006-01-08T13:23:00.000-06:00

Stephen Roach tries to put 2005 behind him, Dr. Hussman shares some thoughts on 2006 and Jim Willie is, as usual, mad as hell.

portfolio notes--ASFI, STZ

2006-01-07T09:27:00.000-06:00

Asta Funding (ASFI) seems to have shaken off it's post-earnings malaise and is back near $30. This week, the co. announced very strong purchases from Q106.

Constellation Brands (STZ) reported a pretty strong q (solid organic sales growth) but shares slid on it's muted full year outlook. However, with the strong market this week and some positive analyst notes, STZ came back strong on Friday.

(note that I am long shares of ASFI and STZ)

Review of Greenblatt's new book

2006-01-07T09:08:00.000-06:00

I just completed Joel Greenblatt's popular new book, "The Little Book that Beats the Market." It's a pretty breezy read as far as finance books go. His formula, which makes a lot of sense to me, is to buy high quality (defined by high returns on capital) co's at bargain prices (defined by high earning's yields). Applying his formula would have worked very well over the past 17 years on small, mid and large cap companies. Plus the model decile fall-off is in order. By that I mean that the highest rated stocks that fall in Decile 1 outperform those in Decile 2, those in Decile 2 outperform those in Decile 3 and so on.

That said, I'm not going to rely on the Greenblatt Magic Formula as my investment research panacea. There are a few shortcomings that I see (and that Greenblatt also recognizes). First of all, the ROC metric is backward looking. If ROC is so important, I care more about what it's going to look like over the next few years. Secondly, just because Decile 1 outperforms Decile 2, it doesn't mean that all stocks in Decile 1 are exceptional. With these points in mind, I still think it's worthwhile to use magicformulainvesting.com as a screening device. Go to the site and find a few dozen stocks to dig into further for posible investment.

Stephen Roach reviews

2006-01-03T19:15:00.000-06:00

some lessons learned in 2005.

Good recap of a talk that Greenblatt gave

2006-01-02T11:25:00.000-06:00

at a NY Securities Analysts meeting.

a new position, White Mountains (WTM)

2005-12-30T15:27:00.000-06:00

A few months ago, I had written about White Mountains Insurance Holding Co. (WTM). Today, I decided to take the plunge and picked up shares at $559, or about 1.6x book value. Below are some comments from WTM's Q3 10q:

Book value at $345/share, down $14 seq. but up from $320 a year ago.

One Beacon (P&C unit):

Specialty lines -- combined ratio at 124 (24 loss ratio points due to hurricanes)
Personal lines -- combined ratio of 81 vs. 92 ly; net premiums down 26% in Q305 vs. Q304; I like to see this, it shows discipline. Co. cites unfavorable markets in NY and MA.

WM Re (reinsurance)
Whopping 156 combined ratio (63 from Katrina and Rita) for Q305 vs. 122 for Q304; gross written premiums down 10% yoy (again, shows discipline), Management notes that pricing is firming for reinsurance.

Esurance (online unit) -- 83% growth in net premiums; loss of $6.5mm pretax (a bit surprising, Esurance was pretax profitable in past q's). Expense ratio increase more than offsets positive claim frequencies.

Investment unit--inv. income up 33% in Q305 vs. Q304.

So why did I go long?

I view two big negatives in the quarter as non-recurring. WTM took big hit from it's Montpelier stock holdings and also lost $186mm after tax from Katrina and Rita (vs. $84mm from hurricanes in Q304). Of course, hurricanes will return next Fall but I doubt that the season will include a Katrina or Rita.
WTM practices what they preach in terms of underwriting discipline (not focused on just writing new business to grow premiums)
Insider buying has been occurring.
Low beta name.
WTM's investments are concentrated in short duration securities. As s-t rates rise, these securities, once they mature, will re-price at higher rates.
Post Katrina/Rita, pricing will firm.

John Makin's

2005-12-30T09:54:00.000-06:00

take on what the Fed might do in 2006.

a few quick notes

2005-12-29T09:36:00.000-06:00

Goldman is out with some positive comments on Consellation Brands (STZ) today. For Q3, they see strong organic growth -- Mondavi charges tapering off into Q4 -- investors becoming more comfortable with quality of earnings. Valuation still attractive.

I'm thinking about Circuit City as a short if it can get to $25. In terms of operations and merchandise, I think CC has improved in recent years, but it's still a consumer electronics retailer (plenty of competition, slim margins). If the US consumer ever comes back to earth, the $0.97/share in EPS that analysts peg for next FY might be a stretch. Even if CC somehow gets to $0.97, valuation should cap the upside (25x at $25/share)

Provided nothing dramatic happens over the next few days, I'll be picking up some Tortoise Energy (TYG), a closed-end MLP fund. TYG yields almost 7% and trades at a 10% discount to its NAV at the end of Q3. Here are the most recent conf. call slides.

A couple of other names I'm looking at --Coke (KO) was brought to my attention by a successful value manager, decent div. yield, sits near 52 week low. I'm a contrarian so I'll take a look. Lions Gate Films (LGF) -- I like their strategy of putting out relatively inexpensive films targeted at niche audiences. They made a mistake with the "Usher movie" and shares were punished. I have a lot more to dig into here.

Tax benefits from Stock Options

2005-12-25T10:32:00.000-06:00

I've just about finished Charles Mulford's "Creative Cash Flow Reporting." One issue that he discusses in the book is the tax benefits that firms get on stock options. Essentially, co's get an expense deduction on their tax return that is equal to the market price of the shares less the exercise price of the option. Mulford argues that this and other items should be removed from Operating Cash Flow to come up with a more sustainable OCF number. For many technology firms, this stock option benefit is no small number. For example, in the year 2000, 40% of Microsoft's OCF came from tax benefits related to stock options.

Cadbury Schweppes (CSG)

2005-12-19T20:08:00.000-06:00

I've previously written about the merits of gum/confections co. Wrigley (WWY). Even though I remain positive on the company, I'm not sure that, at current valuation levels, the risk/return is significantly in my favor.

Another confectionery giant that I've started to look at is Cadbury Schweppes of the UK. CSG has ADR's so trading this name won't be a problem. 2004 sales were 6.7 billion pounds with operating profit of 916 million pounds (13.6%). Market cap is about $19.1B and CSG pays a 2.5% yield. At today's close of $37.40/ADR, CSG trades at about 14x consensus 2006 EPS.

The data that I reference below comes largely from the CSG 1H05 report and also the co's most recent business update pr.

In the 1st half of 2005, sales came in at 3.1B pounds, up 6% yoy and op. margins came in at 14.4% vs. 14.5%.

Americas Beverage is the 2nd largest operating segment at CSG with 1h sales of 770mm pounds (up 5% yoy) and op margins of 29.1% (off 30bp yoy). The big carbonated brands here are 7up and Dr. Pepper. Carbonate share in the US was up 70bp in the 1H -- margins down due to heavy promotional support of brands. Launching new non-carbonate drinks (Mott's Plus, Diet Snapple drinks)--marketing spend up more than exp. here too. Sales of bevg. to Mexico up 20% (Penafiel water brand).

Americas Confectionary is the 4th largest op. segment with 1h sales of 457mm pounds but it is also the fastest growing (sales up 14% in 1H, margins up to 13.3% from 12.2%). Key brands here are Halls, Dentyne, Trident. US sales up 12%, Lat Am up 20%) Logistics/IT issues resolved.

Europe, Middle East, Africa (EMEA) is the largest segment (962 million in revs +6%, 12.8% op margin - down 100bp in 1H05). Plagued by weakness in developed Europe. Africa, Eurasia, Middle East had sales up 14% and Russia was up 19%

European Bevgs is a segment that CSG has struggled with (in 1H, sales up 2%, op profit off 2%). This segment is on the block -- transaction expected to close in early 2006 for 1.27 B pounds.

The final op. segment is Asia Pacific. 1H05 revs of 491mm pounds, up 7% yoy, op margins up from 9% to 9.2%. Cadbury chocolate in India has 72% market share (up 200bp). Leading gum share in Malysia, relaunched Cadbury dairy milk in China in 2H2004

2004-07 growth plan

Sales up 3-5% constant currency, ex-acq -- in pr, CSG said that they will be near high end for full yr. 2005

Underlying op margin growth of between 50-75bp per year constant currency (in 2005, op margins won't increase by this range -- heavy investment in brands, fuel, in 06, this should be better)

FCF of 1.5B pounds in four year period ending in 2007

I think CSG's plans for success make sense and are similar to those of WWY, namely, grow sales in the developed markets in the low-middle single digits, invest in your brands and earn high margins. In the developed world, the name of the game is volume growth. So in places like China and Turkey and Malaysia, CSG will establish their brands and set up opportunities for margin expansion.

Speaking of Turkey, CSG will acquire a further interest in the #2 confection co. there. This will allow them to establish a hub in the fast growing region and will also allow CSG to shift some supply of gum (that will make it's way to the EMEA) to a lower cost location.

To further generate cost savings in Europe, CSG will begin building a new gum factory in Poland in 2006 and is also currently investing $30mm pounds in a plant in Mexico (supply moving south from higher cost Canadians).

To sum it up, I like the business, the stock isn't too expensive. It's a defensive idea with a decent dividend. In the next 3 yrs, sales growth of 5% and op margin expansion of even 50bp annually sounds pretty good to me. I don't have funds available at this time but I'll likely do some juggling if we approach $36.

one more post on Asta Funding (ASFI)

2005-12-18T09:50:00.000-06:00

Interesting chart from the 10k. From this, it looks like the purchase price for an avg. portfolio is recovered in a 1-2 year period.

PORTFOLIO PERFORMANCE (1)

The following table summarizes our historical portfolio purchase price and cash collections on an annual vintage basis since October 1, 2001 through September 30, 2005.

                                                                # of Weighted
                       Cash Collections  Total Collections      Average Days
Purchase    Purchase     Including Cash    as a Percentage     Held During First
Period      Price(2)       Sales (3)      of Purchase Price      Year Acquired
------     ----------       --------       -----------------   -----------------

2001       $65,120,000    $93,785,000             144%                119
2002        36,557,000     50,703,000             139%                183
2003       115,626,000    132,758,000             115%                 81
2004       103,743,000     93,910,000              91%                170
2005       126,023,000     39,762,000              32%                181

(1) Total collections do not represent full collections of the Company with respect to this or any other year.

(2) Purchase price refers to the cash paid to a seller to acquire a portfolio less the purchase price refunded by a seller due to the return of non-compliant accounts (also defined as put-backs).

(3) Cash collections include: collections from our third-party collection agencies and attorneys, collections from our in-house efforts and collections represented by account sales.

Greenblatt's Value Investors Club (VIC)

2005-12-17T14:33:00.000-06:00

Value Investors Club is a message board site that limits it's membership to 250 members. To join the club, you need to present a well-reasoned "value" idea to a VIC panel. If they accept your idea, you can become a member and are able to post to the site and read the ideas in real time. For the rest of us, through sign up, we can access the board on a 45 day delay. Check it out.

the Asta Funding (ASFI) adventure, part 2

2005-12-17T14:03:00.000-06:00

more excerpts from the ASFI cc.....

on portfolio sales (more on this later):

  If we have paper that's got a value to it or a better
 value to it we're not going to sell that paper. The resale
 market has always been after this company. The company has
 been selling paper for `99 and we stopped selling it and
 we started picking up selling paper again in '03, '04,
 '05. It's a business strategy that works very well for
 this company by not having a large overhead. It gives us
 another avenue to let the paper go rather than just keep
 recycling it with collectives.

Kara Murphy: 

So would it be safe to say in '06 then that you would
expect to have like the same proportion of sales to
purchase this?
 

I honestly couldn't tell you that. You know, again we'll
look at the portfolios and analyze them and see how old
they are, how many times they've been worked and whether
or not it makes sense to sell the paper, if it's
opportunistic or not. Price certainly does fit into that
because we don't give this stuff away. But again we are
getting prices that we feel are acceptable to us and it's
for paper that we really don't want.




on the new bankruptcy law:

It's been (unintelligible). Much better than expectations.
We did not expect the influx of portfolios being brought
to market as quickly as they have been. That's part of the
reason why we've been able to step up this quarter's
purchases to its, you know, that the level we have an
anticipate closing on some other material transactions
shortly. That's why we increased our credit facility.


Despite the very strong Q4 and FY05 report, a few
analysts (Stephens and American Growth) are both
concerned with the stepped up pace of portfolio
resales (38% of collections).  I think what they're
worried about is the sustainability of resales and
how best to model their impact going forward. From
a P&L standpoint, it's much easier to figure out
the eps impact when Asta purchases a portfolio for
3 cents and winds up collecting 7 compared to a
situation where it buys a portfolio for 3 cents,
collects 3 cents and then sells the paper off for
an additional 4 cents.  In the latter situation,
the earnings gains should be higher because the
costs on collecting that last 4 cents are avoided.
In general, I think this resale issue is overblown.
I haven't seen any indication that Asta has been
buying paper for 3 cents and re-selling it for 2
cents.  I'm on board with Gary Stern's comments
that Asta will continue to be opportunistic with portfolio
sales going forward.

In summary ASFI executed nicely in Q4 and FY05 and
continues to validate it's outsourcing business model.
Plus, FY06 is already off to a strong start in terms
of new portfolio purchases.  And finally, like I thought,
ASFI FY06 (ends Sept.) EPS estimates are up to $2.50.
Right now, we're only 11x that figure.  I'm staying put.


{note that I am long ASFI shares}

the Asta Funding (ASFI) adventure, part 1

2005-12-17T13:21:00.000-06:00

ASFI did a good thing in making it's Q4 and FY2005 cc transcript available through an 8k. If you're interested in ASFI and have 15 minutes, I'd recommend checking it out. While you're at it, give the 10k a look too. Below are some of the key excerpts from the cc.

on industry changes:

we have seen a lot of activity in our space
due to a variety of factors, including a change
in the bankruptcy laws and anticipated increases in
minimum payments on credit cards by the issuers.
Both of these have led to increase charge-offs
and have enabled us to make significant purchases
during the first quarter of fiscal year 2006
and have greatly increased our pipeline.We also
anticipate closing on more purchases in the year
future.

on ASFI's purchasing philosophy:

Firstly, Asta typically bids on
larger portfolios to reduce competition and given the
larger size of the portfolios, it enables us the
flexibility to use our various strategies of collecting to
the maximum.

Secondly, every portfolio is different. We scrub or
analyze each portfolio prior to purchase and implement
proprietary techniques to estimate how well the portfolios
could perform. The bottom line, pricing a portfolio for
purchase is the number one key to successful profits in
our business.

And although our blended rates are not in a consistently
tight range, that does not mean we are struggling with our
purchases, actually, on the contrary. We find that our
success in the last several years is due to our
disciplined approach to purchasing our portfolios and
making sure that whatever we invest in has a solid chance
of returning superior results to our investors.

on the collections process:

Asta mitigates
turnover risk and the risk of hiring and managing hundreds
of thousands of collectors by outsourcing a vast majority
of its collections with a network of collection agencies
and law firms that the company has developed over many
years. We have excellent relationships with these firms
and the results have been excellent whether it be credit
card or telecom paper.

While their job is to collect, let me emphasize that it is
our duty to continually monitor the collection process. We
are in touch with our network of servicers on a consistent
basis, making sure the process is going smoothly, and that
each and every firm is working the paper up to our
expectations.

Asta, due to its flexible business model, has the ability
to act quickly and move paper around. In the normal course
of business, we usually move paper from one group in our
network to another and continuously do that process in an
orderly fashion to maximize results. This moving usually
occurs within a six-month period and usually at around six
months, which is the industry norm.

on capacity of outsourcing firms to handle more ASFI business:

we select the people we do business with.
Actually all of our people, all of the services, law firms
and agencies, constantly ask us for more paper. They have
excess capacity.

With that being said, (there are) probably another 30
groups that we know of that have - we've known for a long
time that would love to do business with us. It's our
choice and we pick and choose who we do business with.

We've been doing this for many, many years. And we're also
loyal to the people that do a good job for us. And, you
know, we set the standards on how they should collect. We
try to be open minded with them and we constantly monitor
them.