In late April, Portfolio Recovery (NASDAQ: PRAA) reported better-than-expected earnings, launched a massive share buyback plan, and announced a one-time special dividend payment of $1 per share. The stock jumped on this positive news and has hardly looked back since.

Portfolio Recovery is one company that actually benefits from a deterioration in consumer credit quality. The firm buys up pools of defaulted credit card debt, automobile loans, and even unpaid telephone bills. Because these loans are delinquent or in default, they can be scooped up for just a few pennies on the dollar.

The original lenders that sell this debt can at least recoup some of their losses before writing the loans off the books. And if Portfolio Recovery collects on even a small percentage of the debt it buys, then the company earns a tidy profit. The trick, of course, is not to overpay.

When consumer credit quality is very strong, there are only a limited number of available pools of appropriate debt for Portfolio Recovery to buy. Because of the limited supply of delinquent debt, competition to buy these loans can be heated -- this tends to push up prices and cut into margins. However, with interest rates rising and the economy slowing, default rates on consumer debt have begun to tick higher. This tends to open up more opportunities for Portfolio Recovery to purchase bad debt on the cheap.

I believe the shares deserve to trade at a 20% premium to their growth rate, which would equate to a multiple of 22X this year's earnings estimates. This would give the stock a target near $70 per share.

For more from Paul Tracy, please visit www.streetauthority.com