Frank Curzio's WALL STREET UNPLUGGED Podcast

Hillary Clinton Just Gave Us an Opportunity to Make Triple-Digit Returns

hillary clinton navient

Young people don’t seem to like Hillary Clinton.

Recent polls suggest the Democratic presidential nominee is out of touch with voters under the age of 30. She even went as far to do the “Nae Nae” (a dance move popular with youngsters) on Ellen — one of the top daytime talk shows.

After that massive failure, Clinton just announced a new strategic initiative to reach out to young voters. She’s targeting the tens of millions of millennials who are saddled with student debt.

In particular, Clinton said she is “outraged” with a company called Navient (NAVI).

Navient was spun-off from the old Sallie Mae in 2014. Sallie was one of the largest owners of student loans before the spin-off. These loans are now on the books of Navient. In fact, the company owns close to $100 billion in student loans.

Clinton’s attack of the student loan industry has become headline news. As a result, shares of Navient sold off after she promised to target “misbehaving student loan companies” if elected president.

For bold investors willing to ignore the negative headlines, Navient could make a great addition to your portfolio. In fact, this widely misunderstood company could generate triple-digit gains for investors in less than two years’ time.

Let me explain …

Navient’s student loan portfolio was originated under the government’s Federal Family Education Loan Program (FFELP). This program was shut down in 2010.  However, these loans remain on Navient’s balance sheet today.

This portfolio amounts to nearly $100 billion in student debt loans. And more than 95% of these loans are guaranteed by the U.S. government.

Navient funds these loans — as well as its private loan portfolio — by issuing asset-backed (ABS) securities. These are illiquid loans (mortgages, auto loans, credit cards) that are pooled together into one product. This product (called securitization) would then be sold to general investors.

ABS securities are usually safe investments when properly managed.

However, bankers began pooling risky housing loans (subprime) and selling them to investors with investment-grade ratings on them. These types of risky loans got investment banks into huge trouble during the 2008-’09 credit crisis.

A few months ago, credit agency Moody’s placed several tranches of Navient’s private debt on negative review. This step is taken by ratings agencies to further analyze the debt of a company before actually upgrading or downgrading their rating.

This story — coupled with the recent attack from Hillary Clinton — resulted in a mass sell-off in the stock. Navient lost more than 50% of its value over the past 12 months. Shares are now trading roughly 40% below their April 2014 IPO price.

navient corp

The financial media had a field day with the credit ratings story. After all, there have been hundreds of articles highlighting how 40 million young Americans are sitting on over $1.3 trillion in student debt.

But taking a closer look at the facts, the chance of a potential debt downgrade is highly unlikely.

For example, Moody’s placed 14 tranches of Navient’s asset-backed security portfolio on negative watch in August. The agency said these specific unsecured loans (totaling $4 billion due through 2018) may be at risk of default.

To put this in perspective, the $4 billion in loans amounts to just 3% of Navient’s total loan portfolio. Plus, these loans are “non-recourse term-securitizations.”

This is a fancy way of saying Navient has no obligation to buy out these loans if the trust defaults. And the company WILL NOT see higher funding costs if these loans are downgraded.

Yet, Navient has already taken steps to address these concerns from the ratings agencies. The company raised more than $2 billion over the past few months by issuing more asset-backed security loans and call options on their debt.

Without getting too technical…

The $4 billion in debt on negative watch has already been reduced to $2.3 billion. And management said more than half of this ($1.2B) “is current and students have made more than 25 monthly payments on these student loans.”

Despite all the negative headlines, Navient’s private loan portfolio is seeing its strongest credit metrics since 2005This includes lower change-offs (money put aside to cover potential loan defaults) and delinquency rates.

Turning to Navient’s huge $100 billion student loan portfolio, more than 95% of these loans are guaranteed by the governmentAnd Navient also has a services / asset recovery platform that works with students to help pay their loans.

Navient’s ‘Money Under 35′ study shows education plays a big role in achieving excellent financial health among borrowers ages 22 to 35
Navient’s ‘Money Under 35′ study shows education plays a big role in achieving excellent financial health among borrowers ages 22 to 35

This division includes default aversion, account maintenance and debt collections. And it’s the best in the business — having a 38% higher success rate of receiving payments compared to its peers.

Navient was quick to point this fact out to Hillary Clinton following her attack on the company last week.

In short, Navient is a solid company trading at a dirt-cheap price. The company projects it will generate more than $33 billion in future cash flows over the 20-year remaining life of its loan portfolio. This is a huge number considering the total market cap of Navient is less than $4 billion.

Plus, Navient just announced (in December) a $700 million buyback program. This brings the total buyback plan (combined with its previous buyback plan) to $755 million.

To put this in perspective, Navient’s market cap is $3.7 billion. This means the $755 million is enough cash to buy back 20% of the company’s outstanding shares.

These positives — which are rarely mentioned in the media — are why some of the smartest investors in the world have a position in Navient. This includes: The Vanguard Group (10% owner), BlackRock (5.6% owner), Fidelity (4.9% owner), State Street (4.7% owner) and Goldman Sachs Asset Management (1.3% owner).

Omega Advisors is also a huge shareholder (owns 4.2%). This fund is run by billionaire Leon Cooperman — who increased his ownership in Navient by more than more than 40% last quarter.

Navient is one of the most misunderstood companies I ever researched. The media loves to bash the company … our politicians love to bash the company … and most Americans with large student loans love to bash the company …

In fact, if you look at the recent headlines on Navient, they are dominated with potential lawsuits. Dig a little deeper, though, and you’ll see that these are mostly ambulance-chasers. They are just trying to make a few bucks on a highly publicized stock that lost half of its value over the past 12 months.

So for a potential investor who sees the bigger picture for the company, the stock is dirt-cheap.

The company plans on buying back 20% of its shares outstanding. And some of the smartest investors in the world are big shareholders.

I suggest that you ignore the negative headlines and consider buying Navient at current levels. The stock is worth at least 50% more based on valuation alone. And investors receive a 6% dividend on the stock, which is easily covered by future cash flow.

However, the stock has much more longer-term upside, as the company should generate billions in cash flow every year from its huge loan portfolio.