A Cheap Way to Capitalize on High Expectations, Parts I & II

A Cheap Way to Capitalize on High Expectations, Part I:

  • Today’s Chart For The Curious shows the PE ratio of the S&P 500 minus the forward PE ratio of the four major credit card companies
  • Since 1992 the broad market has never been more expensive relative to the methods by which people buy things
  • Remarkably, the forward PE ratios used for all the credit card companies have 2021 earnings estimates below their 2019 levels – hardly optimistic
  • Kailash believes the market is richly priced on optimism around the interaction of pent-up demand and record stimulus, yet inexplicably, credit card companies have not benefitted from any meaningful re-reating

The last time credit card companies were even CLOSE to this cheap relative to the market was in 2000.  Unlike then, we believe credit card companies today may represent a “trough on trough” opportunity; to learn why see Part II below.

A Cheap Way to Capitalize on High Expectations, Part II:

  • As the Wall Street Journal noted, financials are sitting on vast reserves for losses that did not materialize
  • Kailash believes many credit card companies have the reserves to brace for a recession should one happen
  • As shown in the chart below – credit card companies have only represented a smaller percent of total market cap at the very trough of 2009

Kailash believes today credit card companies may carry ample reserves for losses that have not yet happened and will be the primary conduit for fiscal stimulus to reach the real economy.  No matter if we look at the market’s forward earnings expectations or their market cap, nobody else seems to agree.  Sometimes the best ideas are the most simple ones.  To see where these and other financials rank in our proprietary scoring systems, click here.

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Disclaimer

The information, data, analyses and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. 

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Kailash Capital and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.