Credit Suisse
Now is still a good time to own the student lenders.
We believe that student lenders remain attractive at today's
levels given positive fundamentals and that Credit Suisse's public
policy team expects Republicans to win the Senate while our
research shows that Republicans taking control of the Senate or
White House is correlated with post-election outperformance. We
believe this is due to diminished regulatory risk characteristic of
a Republican-controlled electorate.
We find a positive relationship between Republicans gaining
control of the White House or Senate and outperformance in student
lenders. Our study looks at both SLM (ticker: SLM) (pre-split) and
Nelnet's ( NNI) pre- and post-results stock performance following
presidential, Senate and House elections over the past 15
years.
Republicans have historically fought detrimental legislation
originating from Congressional Democrats. Examples of the election
effect include; student lender underperformance (SLM, down 4%;
Nelnet, down 7%; S&P 500, up 1%) one week after the 2006
elections, when Democrats gained power; outperformance one week
after the 2004 elections when George W. Bush won and Republicans
retained control of the House and Senate (SLM, up 11%; Nelnet, up
16%; S&P 500, up 1%); outperformance (SLM, up 8%; S&P 500,
down 6%) after Bush won the 2000 election.
Our Public Policy team believes Republicans are likely to win
the Senate. On Oct. 30, our public policy team stated that "In the
Senate, we believe that the margin of victory will be narrow, but
that barring any game-changing events between now and Nov. 4, the
Republicans will likely take control of the Senate."
We note that the Consumer Financial Protection Bureau (CFPB)
recently published its annual private student loan report which
emphasized the Bureau's preference for lenders to provide formal
restructuring options to borrowers and in the absence of such
options the CFPB might further the dischargeability discussion.
Given the fact that the majority of loans have co-signers,
dischargeability represents more headline risk than actual
financial risk.
Current multiples leave room for modest expansion. We think that
Navient (NAVI) and Nelnet's price/earnings multiples have room to
expand modestly with Navient trading at 9.7 times next-12-months
price/earnings multiple and Nelnet trading at 7.8 times
next-12-months price/earnings multiple.
Student lenders have performed well over the last month and
while the election effect may already be manifesting, we believe
these stocks could continue to outperform, if Republicans win the
Senate. Part of the recent outperformance could be due to the
expectation for short-term rates to remain lower for longer and the
likely sale of Wells Fargo's ( WFC) $9.7 billion Federal Family
Education Loan Program (FFELP) portfolio.
-- Moshe Orenbuch
-- James Ulan
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