Will the Party End Soon for Small Cap Debt Collection Stocks? ASFI, ECPG & PRAA

Small cap debt collection stocks like Asta Funding, Inc (NASDAQ: ASFI), Encore Capital Group, Inc (NASDAQ: ECPG) and Portfolio Recovery Associates, Inc (NASDAQ: PRAA) could be the latest target of a government shakedown or crackdown as the Consumer Financial Protection Bureau said this week that before it formally proposes any rules for debt collection, it wants to hear how collectors verify borrowers' information and communicate with consumers. In other words, debt collectors could be restricted from using text messages, social media or other Internet-based tools in their pursuit to collect debts. With about one in 10 Americans coming out of the financial crisis with some debt in collection, investing in small cap debt collection stocks has been profitable for investors. However, there is no timeline for when any new rules might be released for review or come into effect.

With that in mind, here is a look at three small cap debt collector stocks which could be in the crosshairs of any new restrictions on how they pursue delinquent accounts:

Asta Funding. A consumer receivable asset management company that specializes in the purchase, management and liquidation of performing and non-performing consumer receivables, Asta Funding generates revenues and earnings through the purchase and collection of performing and non-performing consumer receivables (e.g. MasterCard, Visa and other credit card accounts) that have typically been either charged-off by the credit grantors or not considered to be prime receivables. Asta Funding is more lightly traded as it averages under 11,000 shares per day and there is not so much news on the financial wires about the company. Last August, Asta Funding reported a 9.5% revenue increase to $12,668,000 (but the figure included $2,287,000 from personal injury claims as compared to $507,000 included during the third quarter of fiscal year 2012) along with a net loss of $2,737,000 verses net income of $3,048,000. Results were apparently impacted by an impairment on the "Great Seneca" portfolio of approximately $10.2 million, but the good news is that the significance of the negative impact of this portfolio on results moving forward will be greatly reduced. In addition, Asta Funding purchased a consumer debt portfolio with a face value of $53 million for $3.3 million during the quarter. On Tuesday, Asta Funding fell 0.47% to $8.43 (ASFI has a 52 week trading range of $7.95 to $9.82 a share) for a market cap of $109.31 million plus the stock is down 11.4% since the start of the year, down 8.9% over the past year and up 147.9% over the past five years.

Encore Capital Group. A provider of debt management and recovery solutions for consumers and property owners across a broad range of assets, small cap Encore Capital Group's subsidiaries, including Midland Credit Management, purchases portfolios of consumer receivables from major banks, credit unions and utility providers, and then "partners" with individuals as they repay their obligations and "work toward financial recovery." Last August, Encore Capital Group reported that gross collections from the portfolio purchasing and recovery business had increased 16% to $278.4 million while net income from continuing operations came in at $11.0 million verses income from continuing operations of $19.0 million for the same period last year. During the quarter, Encore Capital Group completed the acquisition of Asset Acceptance which increased the company's Estimated Remaining Collections ("ERC") by almost $1 billion to more than $2.7 billion while on July 1, the company entered the UK debt collection market by acquiring a controlling interest in Cabot Credit Management. In addition, Encore Capital Group completed a placement of $150 million in convertible notes while in July, the initial purchasers exercised (in full) their option to purchase an additional $22.5 million in convertible notes. Otherwise, Encore Capital Group is scheduled to release its third quarter results tomorrow after the market closes. On Tuesday, Encore Capital Group fell 0.47% to $47.08 (ECPG has a 52 week trading range of $24.34 to $50.92 a share) for a market cap of $1.19 billion plus the stock is up 53.8% since the start of the year, up 76.9% over the past year and up 403% over the past five years.

Portfolio Recovery Associates. Offering a broad range of debt purchase and business service solutions to a diversified base of financial institutions and government clients, Portfolio Recovery Associates' debt purchasing subsidiaries purchase consumer and small business accounts that have been charged off from the books of major banks, retailers, credit unions, consumer and auto finance companies, telecommunications, utility providers, student loan lenders and other businesses. Near the end of October, Portfolio Recovery Associates reported a 27% increase in cash collections to $291.7 million, record revenues of $197.8 million (up 31%) and record net income attributable to PRA of $47.3 million (up 42%). The CEO note:

"PRA's renewed focus on our fee-for-service businesses also contributed to our third quarter profitability. Fee income from these businesses substantially increased to $26.3 million during the quarter, aided by a single, large Claims Compensation Bureau case, helping to drive PRA's bottom-line results."

In the earnings call, the CEO noted that Portfolio Recovery Associates continues to view the "UK as a great long-term opportunities with thoughtful prudent growth" while the company's year-to-date investment totaling $557 million has exceeded its 2012 full year purchasing of $539 million with one more quarter plus the trailing 12 month investment of $756 million speaks to PRAA's "ability to take market share from competitors even as we drive record levels of profitability." On Tuesday, Portfolio Recovery Associates fell 0.73% to $58.54 (PRAA has a 52 week trading range of $30.63 to $63.96 a share) for a market cap of $2.97 billion plus the stock is up 64.3% since the start of the year, up 72.9% over the past year and up 389.5% over the past five years.

Finally, here is a look at the long term performance of all three small cap debt collector stocks:

As you can see from the above chart, Encore Capital Group and Portfolio Recovery Associates have put in the best performance over the long term while Asta Funding has sort of been flat since recovering from the financial crisis. Moreover, all three debt collector stocks are looking pretty solid given their recent financial results. Nevertheless and with the government putting the debt collection sector in its crosshairs, it will be interesting to see whether the technical charts retain their bullish patterns when any proposed new rules are released.