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Dear Mr. Berko:

Dear E.D.:

I think 80 percent of your broker’s terminals are fried. Do not, and I repeat, DO NOT sell Johnson & Johnson, Ralcorp Holdings Inc. or General Electric Co. All three of those issues are on my “buy” list, and I’m willing to wager my mint-condition collection of 47 Barbie dolls to any GI Joe action figure that the price of his sell recommendations will double in the next five to seven years. Read on:

99¢ Only Stores (NDN-$10.44) is a deep-discount retailer that sells name-brand consumer merchandise purchased at closeout sales. NDN also retails private-label products such as kitchen items, housewares, toys, seasonal items, pet-care and hardware products imported from India and China, etc.

Management, which owns 33 percent of the stock, believes NDN will post 2008 revenues of $1.7 billion from its 265 retail stores, mostly in Southern California. NDN has a good business model that is a near-perfect fit for today’s economy, because lots of Americans are looking every which way to reduce their spending. This is a small-cap company with only 71 million shares outstanding, zero debt and a strong cash position.

However, NDN has a very serious problem — its employees are stealing the company blind. Supervisors can’t police them because the potential legal costs for discrimination and possible violation of employee civil rights laws could devastate the company’s balance sheet. Because margins are so tight, the installation of cameras, security devices, electronic tags and tighter cash register controls would be ruinous to NDN’s earnings. I like this company, and I’m impressed that management has enough confidence to own 24 million shares. But because NDN can’t control employee theft, I’m not comfortable recommending the stock.

Portfolio Recovery Associates Inc. (PRAA-$26.80) is an interesting business for troubled times. PRAA purchases portfolios of defaulted consumer receivables. These receivables are unpaid obligations to credit unions, department stores, auto finance companies, small loan companies, banks, retail merchants, MasterCard, Visa, Discover, utilities and various municipal government accounts. PRAA’s purchased portfolios generally range in size from $1 million to $150 million in face value, with an average individual account balance between $450 and $7,000. In 2007, PRAA bought $11.1 billion in bad debt for $263 million, or less than 3 cents on the dollar. Management believes it will collect between $600 million and $750 million, representing a gross return of almost three times cost.

The company has a strong history of annual revenue and earnings growth and a strong balance sheet. Standard & Poor’s believes PRAA will earn $3.10 a share this year and perhaps $3.85 in 2009. Though our current hard financial times present PRAA with plenty of opportunity to purchase debt at attractive prices, collections as a percentage of receivables could decline because it’s getting more difficult today to “squeeze water from a dead horse.” Still, the shares, which are trading at their 52-week low and 27 points from their 52-week high, could be a good commitment if you are not skittish about where their profits are made.

Meanwhile, as a terribly rank speculation in the same business, you might peek at ASTA Funding Inc. (ASTA-$2.09). This is a significantly smaller competitor, and its share price was trading in the $40s a little over a year ago. Wall Street thinks it will earn 65 cents per share this year and 75 cents in 2009.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2008 Creators Syndicate Inc.