3 Stock Picks: SLM, TPP, CNO

Sallie Mae Secures Contract -- and an Upgrade

Government-backed student loan provider Sallie Mae (SLM: 10.05, +0.78, +8.41%) received a passing grade from investors, who sent the shares 10% higher in early Monday trading, following a key analyst upgrade and the landing of a crucial government contract.

J.P. Morgan analyst Andrew Wesel gave Sallie Mae's stock an Overweight rating late last week, boosting it from Market Weight on the strength of its shifting business model. He said its transition to servicing loans � collecting payment and interest � and no longer originating loans would boost its earnings and growth.

"We are upgrading SLM on a long-term view that its transition to primarily a loan servicer, as opposed to a lender, will lower interest rate and funding risks, thus improving earnings visibility," he wrote.

The upgrade stemmed from a June 17 announcement that Sallie Mae was selected as one of four companies named by the Department of Education to service loans that it will start issuing in September. Sallie Mae will be joined by Nelnet (NNI: 13.61, +1.31, +10.65%), Great Lakes Education Loan Services and American Educational Services/ Pennsylvania Higher Education Assistance Agency. The quartet will also service Federal Direct Loan Program loans starting this autumn.

Sallie Mae said at the time it could handle more than $100 billion in new volume immediately.

"Winning the contract removes a major uncertainty and confirms our view that the company will be a player in the student lending business for the long term," wrote William Blair & Co. analyst David Long in a June 18 note. "While the company's business model continues to evolve and the new servicing economics are somewhat uncertain, recent developments have been quite positive."

Bottom Line: Buy
As the recent financial collapse shows, it's far better to be on the hook just for collecting loans, rather than making them and being burned by defaults. Recent graduates are likely to be more frugal and better payers than their overextended, house-payment defaulting, personal-bankruptcy-declaring predecessors.

Teppco Shares Propped by Merger Bid

Investors applauded oil exploration and production company Teppco Partners' (TPP: 30.12, +1.43, +4.98%) announcement that it agreed to be acquired by Enterprise Products Partners (EPD: 24.96, -0.33, -1.30%) in a $3.3 billion deal. Teppco's shares rose 5% in early Monday trading. Enterprise shares declined a bit more than 1% at the same time.

Should the deal go through, it would create the largest publicly traded master-limited partnership, a common tax-advantaged structure used by energy pipelines. The combined company would continue as a master-limited partnership, which offers investors the liquidity of a stock with the tax benefits of a limited partnership that returns much of its cash back to investors.

Although falling commodity prices have hit pipeline companies hard in the last several months, Teppco in April rejected a proposal to sell itself to Texas oil magnate Dan Duncan for a reported $2.8 billion.

Enterprise Chief Financial Officer Randy Fowler said on a Monday conference call that adding Teppco will diversify its business into pipelines and storage.

"The combined partnership provides a larger footprint and broader business and geographic diversification with additional avenues to generate incremental cash flow through greater utilization of assets, organic growth opportunities, cost savings and system optimization," he said. "The larger scale translates into more sources of cash flow, one of the credit positives, and greater trading liquidity in our debt and equity securities, which is important to investors."

Oppenheimer & Co. analyst John Cusick wrote earlier this month that broad commodity price fluctuations and a still grim macroeconomic backdrop could keep master-limited partnerships volatile in 2009. Recent rises in crude oil prices, followed by last week's fall below $70 a barrel, are reflected in the stock price fluctuations in both companies.

"Over the near-term we would be a bit cautious in adding significantly to any established positions, but would be buying on any pullbacks or dips," Cusick wrote June 1. "However, long term, we continue to view MLPs as an essential holding for investors with long time horizons and a focus on yield. The capital appreciation is icing on the cake."

Bottom Line: Hold
Mergers often have periods of uncertainty and it's worth waiting for a dip or a rival bid to shift Teppco's prices, rather than buying at the peak of the merger news boost.

Capital Troubles Plague Conseco

In a move to shore up capital, Conseco (CNO: 2.24, -0.16, -6.66%), an insurer that targets the senior market, effectively sold off part of its business, sending shares down more than 6% in early Monday trading.

The company, based in Carmel, Ind., said it would coinsure about 104,000 policies with Wilton Reassurance, in a $57.5 million deal.

"Completing this step is expected to increase Conseco's consolidated risk-based capital ratio by eight percentage points, along with increasing statutory capital," said Conseco CEO Jim Prieur in a prepared statement. "In addition, this transaction will further simplify our administrative operations as we focus on our core insurance businesses."

Alan Rambaldini, a Morningstar analyst, said Conseco has pared other parts of its non-core policy businesses over the last year to boost its capital position.

"They had policies they had acquired a number of years ago, and in exchange for some cash they're taking those polices and giving them to another company, along with assets set aside as reserves for those policies," says Rambaldini.

While the company serves the growing senior market, it's been scrambling to restructure its debts, and its market niche isn't enough to give it a competitive advantage against larger insurers, the analyst says.

Bottom Line: Sell
Another piecemeal deal that can't extricate Conseco from its fundamental troubles may convince investors it's time to cut their losses as the recent three-month rally flags.