Out of Love With Sallie Mae
Sallie Mae may seem like a cheap date these days. But investors looking for a more rewarding relationship should be prepared to be patient.
Sallie Mae, as Wall Street and Washington nicknamed the Student Loan Marketing Association, was once the darling of pension and mutual funds and Wall Street analysts. Before their recent tumble, shares in the leading intermediary in the market for college credit had appreciated 800 percent since first trading publicly in mid-1983. Now many big-buck investors have been dumping them. Shares plunged to $45.50 recently, down almost 40 percent from a 1993 high of $75, and by last week had edged up only to around $47. The hybrid public-private enterprise is backed by government guarantees but earns a profit ($394 million last year) and pays dividends to shareholders.
Behind Sallie Mae's sudden reversal of fortune is President Bill Clinton's planned overhaul of the multibillion-dollar student-loan program. As part of the proposal, the federal Treasury would make such loans directly and the colleges would service them. By eliminating the profits in the program that now go to Sallie Mae and the banks that make the loans, the Clinton administration claims it will save over $1 billion a year.
Beyond building the presumed but iffy cost savings into its budget, the new administration seemingly wants to prove that a reinvented federal government can sometimes do a better job than the private or, in this case, the quasi-private sector. As a Washington-based enterprise, Sallie Mae's sin may be its entrepreneurialism. Reformers resent Sallie Mae's turning a solid profit and, until recently, having a top-performing stock. "This campaign is being driven in part by a populist, bash-the-banks appeal," says Larry Hough, Sallie Mae's chief executive. Not surprisingly, the $2.1 million he earned in salary and benefits in 1991 is itself a key exhibit in the case being made against the current student loan program.
Even with Sallie Mae's future in jeopardy, a handful of analysts continue to recommend the stock--especially at its new low price--but only to stalwart investors. "This is not the widows and orphans stock it used to be," warns Gareth Plank, who follows Sallie Mae for Mabon Securities, a New York brokerage. He doubts that Sallie Mae will vanish in the end, though its profits could wind up being crimped a bit. Plank thinks the shares could be worth as much as $80 in the next couple of years. And even if Sallie Mae gets phased out, he estimates its current book value at $50 a share. "How often do investors get to buy a stock where the appreciation potential is rather substantial and on a liquidation basis the downside risk is rather low?" he asks rhetorically.
Buffett rebuff. Published reports that have linked Warren Buffett, the renowned "value" investor, to a position in Sallie Mae were apparently wrong, unfortunately for those who like to piggyback on Buffett's legendary but far from infallible acumen. "I've never really looked at Sallie Mae," he says. But that shouldn't deter investors from considering the stock on its merits. The ultimate case for Sallie Mae stock assumes the organization will survive because the Clinton plan will not produce the projected savings.
advertisement
