Incorrect Investing

Illustration by Marc Boutavant

S ome businesses are so reprehensible, so impossibly exploitative that they simply must be bought. Okay, that may not sound like sage investment advice, but given the Bush administration’s wanton embrace of corporate interests, investing in a portfolio of companies you couldn’t stand to work for without having a camp-guard mentality, a collection of stocks so motley in morals on the face of it, might be a solid bet right now. In a country where the top 1 percent of households controls 57.5 percent of corporate wealth, if you aren’t thinking about ways to profit from our squeezed middle class, if you are still stuck in the mindless chasm of politically correct investing, you could be leaving fortunes on the table.

Don’t worry, you won’t be doing anything “wrong” by creating a portfolio of profiteers off the poor. Nobody gets helped or hurt when you buy a stock; a stock is just a piece of paper backed up by the full faith and credit of virtually nothing, and you don’t raise money for or get in bed with what you own. You can take all the money you make from these social pariahs and set up clinics and protests and lobbying groups against them (The irony! The revenge!). Besides, almost all companies have an element of undeniable reprehensibility. When professional do-gooder and then-senator Al Gore came to my hedge fund in 1988 and asked me to design a winning portfolio of companies that hadn’t been indicted, investigated, or criticized for some form of political or social inadequacy—pollution, labor violations, tax fraud—I quit after three months of searching. There simply weren’t enough white hats out there to make a diversified portfolio that could beat the market.

Where do we find the best of the best exploiters, the companies that truly represent the seeming worst of rapacious capitalism, the kind that were supposed to sink themselves, courtesy of Marx, but instead have thrived? Why, the New York Times, for one. The paper has consistently spotted the most atrocious corporate behavior, which has led me to some of the best performers out there. I also like Investor’s Business Daily, which has a Dickensian spirit to it, endlessly profiling companies that would have been hounded for bad corporate citizenship in 1840s London.

Enough background. By now, you are salivating at the prospect of making fortunes off the backs of the poor, so let’s take a virtual tour of where the real money’s going to be made from the immense tearing of the social fabric that seems to be going on in this country.

Bankruptcy’s always had a negative connotation, yet the federal government’s just ratcheted up the stakes by making it much harder to come back from the financial abyss. Last fall’s change in the bankruptcy laws also created a stampede of individual filings that have spawned thousands of worrisome headlines about banks’ poor prospects. Forgive me, but there’s some tremendous profit potential here if you stop hand-wringing and start investing in Portfolio Recovery Associates and First Cash Financial Services, both recently profiled deliciously positively in IBD.

Imagine all the money you can send the American Cancer Society from Altria’s quarterly dispensations.

Portfolio Recovery Associates is the new face of the repo man. Using sophisticated computer models telling the company which deadbeats are likely to pay versus which ones are pathetic, with no hope, Portfolio Recovery Associates buys debt from credit-card companies and collects far more with brains than the mob does with baseball bats. The company’s growing at 29 percent a year, and, owing to the change in the law, I think it could have even faster revenue growth in 2006. This $50 stock could go to $75; there’s no reason it can’t succeed just because its branches are next to bus depots and not investment banks.

The need to stave off bankruptcy at any cost has put new life into the pawn-broking industry, which means it’s First Cash Financial’s time to profit. This chain of pawnshops thrives on the immigrant community, which is always in need of short-term cash. First Cash knows where the money is as it expands rapidly in the Southwest, with a gigantic foray into Mexico, where it expects to open 40 to 50 pawnshops in the next year. Mexico’s a cash-based, poverty-stricken country, ideal pickings for a pawnshop, and this one basically serves as the Citigroup for the underclass. I expect this $34-a-share business to hit $45 per share as the poor get poorer continentwide.

Halliburton’s easy. Its veep lineage, and its businesses that require endless amounts of “advance cash” to prominent political officials to get giant infrastructure contracts, will always create buying opportunities from negative headlines—think of it as the Times discount. But the company is splitting into the second-largest oil-service company and the largest infrastructure contractor—Kellogg, Brown & Root—and I think that the two pieces are worth $100 per share, much higher than today’s $80 price. Oh, added bonus: HAL’s been quietly exonerated from almost every headline-generating investigation, including the excessive fuel charges in Iraq.

With more copper and gold than just about any company in the world, Freeport-McMoRan’s long been a standout stock. But in December the Times broke a story saying that Freeport paid large sums of money to Indonesian military officers to look the other way so it could exploit the Papua Province, decimating the landscape, all to keep the largest gold mine in the world operating at full tilt as the yellow metal soared to $550 an ounce. That’s right—another buying opportunity! After the Times story, you caught a twelve-point rebound off a $52 base almost immediately. And there are more buying opportunities every time the Times does a follow-up. Got one just last Saturday, when the paper reported on federal, state, and local inquiries into the mining problem. I can see how this stock, which was trading at $64 last week, might go to $80 this year, on Chinese demand alone. More dogged Times reporting can only help.

Let’s round out this abysmally incorrect portfolio with two flat public-policy embarrassments—Altria and Votorantim Celulose e Papel. Here’s a duo of high-yielders—4.3 percent and 5 percent—despoilers of lungs and forests that could have a huge 2006. Altria’s about to split into three companies, one domestic and one international tobacco company, and Kraft, which just makes bad-tasting processed food but can’t be considered a brigand unless the obesity police take charge of the FDA. The split—I believe the parts will be worth more separately than they are together—should drive this $74 stock right to $105. VCP, the Brazilian paper company, knows that no country filled with tree huggers like the United States can compete with a company that can clear-cut arboreal bounty like eucalyptus with impunity. Much more paper can be gleaned and reamed from that treasured tree than anything we have, and the Brazilian government obviously doesn’t give a hoot about the ecoconsequences.

I know, you need a shower after just looking at your portfolio if you go my route. Yet, think about what happens when you clip that dividend from VCP and send it to the Sierra Club or Greenpeace. Imagine all the money you can send the American Cancer Society from Altria’s quarterly dispensations. And if you are really troubled by the profits, there’s always the United Way. Of course, it’s had its own scandals.

James J. Cramer is co-founder of He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Halliburton and Altria.


Incorrect Investing