Tuesday, November 26, 2013

Hey Hey Sallie Mae

With the market ignoring all bad news and missed earnings, it is hard to find a bargain. But here it is, in the most reviled area of the financial services industry, the student loan servicers. Sallie Mae is trading at P/E of 8 for current earnings. With employment increasing, default rates are declining significantly. Moreover, there is no more reliable a buyer of a stock than the company itself. Sallie Mae has allocated $400m to buyback shares. Guidance for 2014 is $2.94 a share. If the $400m is used at an average stock price of $28/share earnings will be $3.03/share. That makes Sallie Mae seem very cheap, assuming no upside in servicing or originations. The author has entered a long position in SLM. Bought JAN 2015 $27 CALL for $1.90 Sold JAN 2015 $30 CALL for $.90 Net price $1. Upside $3 / Downside $1.