GOP Win Would Lend Student Lenders a Hand -- Barron's

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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