Sallie Mae (SLM): Back to school

"Since the market started its downturn early this year, I have avoided all financial stocks and resisted the temptation of value plays," says Dave Dyer's Newsletter.

He adds "Well, it's now time to violate both prohibitions at once by buying SLM Corp. (NYSE: SLM), commonly known as Sallie Mae, the nation’s largest provider of college loans."

"There must be some financial areas that have predictable, growing demand, willing customers who actually have low default rates, and securitization processes that do not involve the type of financial

engineering that is only intended to hide risk.

"Well, there is such an area, and it even involves a product that it makes sense to finance since it will actually increase in value over time. I’m talking about student loans.

"SLM Corporation was founded in 1972 as an agency to buy student loans from other lenders. In 1997, they decoupled from the government and became an independent public company making their own loans.

"Although they are still frequently called a GSE (Government Supported Enterprise), they have claimed no special relationship with the government since 2004. They currently manage $169 billion in loans. With an $11 billion market cap, they are about five times larger than their nearest competitor.

"The rising cost of college has increased the necessity of financing an education. Also, it is quite easy to predict the growth of the market from the growth in the target population and the increasing percentage of people seeking high education.

"The recent development of non-traditional schools offering on-line education and private trade schools offering advanced technical training has increased the market for education loans.

"So, if it is such a good market, why is the leader down almost 60% over the past year? Of course, the credit crunch made it harder to securitize and market bonds based on the loans they made.

"And then there were the self-inflicted wounds including a dilutive stock offering and a failed attempt to take the company private. And then there was a 'famous' conference call in which the CEO cursed at the media when asked about the sale of 97% of his stock.

"So, six months later, why do I think SLM is a good buy? In general, things are improving. With the election underway, political candidates from both parties will be jumping up and down like eager puppies at the thought of making it easier for college kids to get loans.

"Also, the credit markets seem to be improving. SLM just recently sold $2.5 billion of unsecured notes in an offering that was significantly oversubscribed. This will provide a source of funds for student loans.

"We may also be moving into an era of unusually high demand because recessions are well known to be good for the education market. And, of course, the CEO has frequently apologized. I don’t think it is a big deal. No amount of CEO profanity is worth 20% of an $11 billion company.

"Value opportunities are created when a company declines for no good reason, and I think we now have a chance to buy a good company at a bargain price."