Top Credit Card Stocks: 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 major credit card stocks
  • Since 1992 the broad market has never been more expensive relative to credit card stocks, the methods by which people buy things
  • Remarkably, the forward PE ratios used for all the credit card stocks have 2021 earnings estimates below their 2019 levels – people hardly optimistic
  • Kailash believes the market is richly priced on optimism around the interaction of pent-up demand and record stimulus, yet credit card stocks have been left in the dust

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

S&P500 Price to Earnings - Credit Card Company Price to Earnings

Best Credit Card Stocks to Buy Now: Part II

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

While typically not considered to be recession proof investments, KCR believes today credit card companies may carry ample reserves for losses that have not yet happened. We also believe the products and services including everything from basics to discretionary items that people purchase will largely be bought via issuers of old-fashioned “plastic.”

Total Market Cap of Credit Card Companies/Total Market Cap of S&P500

Could Investing In Credit Card Stocks During a Recession be a Good Idea?

No matter if we look at the market’s forward earnings expectations or their market cap, nobody else seems to agree with our simple assertion regarding credit card stocks above. Sometimes the best ideas are the most simple ones.

To see where these and other financials rank in our proprietary scoring systems, click here.

Today Wall Street is absolutely euphoric over cryptocurrencies and stocks of new banking and payment services. Yet from Discover Financial Services to American Express and other card companies, the vast majority of Americans are still using credit cards to make their daily purchases. We would note that these are hardly obscure firms – they are among the best credit card stocks out there in terms of being reputable household names.

Loans and other consumer financing needs are also still filled, in the short-term, by credit cards and in the long term by banks. One of the KCR research team recently noted that even their PayPal account was linked to a credit card. We are not here to deny that credit card companies are boring, but we do assert they are the primary method people pay for consumer products and services.

We would also note that as a small business, KCR is quite fond of the various perks and benefits that come from using our corporate credit card. Wherever possible we try and pay bills via old-fashioned plastic. And we believe this is true of many. Why not rack up the free travel points while keeping one clean and itemized place to record what you bought where?

Comments like that no doubt flag readers to the increasing amount of gray hair on the heads of KCR staffers (at least those still fortunate enough to have hair!) yet we believe credit card companies are an entrenched part of life. We recognize the novelty and ease of use in services like Square, Venmo and others. Yet unlike Square, credit card companies are valued like they are going out of business. And this, then, is the opportunity in our view.

As noted above, consumers are flush with cash on the back of record government stimulus, the best credit card stocks have massive reserves for losses that have not happened, and the world may see a spending boom. The good news in our view is that even if the spending boom fails to occur, some of the best credit card stocks are priced like things are never going to get better. You are effectively buying some of the only stocks in the market that literally have massive reserves on their balance sheets if things get worse, are priced like things will not improve, and yet have enormous upside if anything should go right.

This is consistent with our affinity for a Margin of Safety approach to investing. You can read our quick takeaways from legendary investor Seth Klarman’s book here. Our view is that credit card stocks today have balance sheets that are set up for a recession and are priced for a recession. They are a sort of “coiled spring” in our view. Can the economy really work if credit card stocks don’t see a surge in consumer spending?

The KCR research team would like to note that we are not financial services experts. For us to come out with a positive view on credit card stocks requires us to believe that the “setup” is quite simple. That is our view today. As always, we would love to hear the views of others – particularly those who disagree with us. We recognize that we often learn the most when listening to the views of those with differing views.

Please see our upcoming White Paper where we discuss our increasingly constructive view of financials. We have added a link to that paper, Growth vs. Income Investing: Why Choose? here for your convenience. That paper uses powerful data to make the case that the pessimism around financials is overdone and while many of the stocks are “overearning” they have some of the safest balance sheets in modern history.

FAQ’s:

Credit Card Stocks: A Complete List

Our proprietary stock ranking modules are what the KCR team uses to help identify the best credit card stocks from the worst. Yet we recognize that not everyone will use our quantamental process and provide below a list of all the credit card stocks in the Russell 1000. Each of them has a link to the associated stock’s investor relations page.

  1. COF: Capital One Financial
  2. AXP: American Express Co
  3. SYF: Synchrony Financial
  4. DFS: Discover Financial Services
  5. ALLY: Ally Financial Inc
  6. V: Visa Inc (not a credit card stock but a great resource to understand the business)
  7. MA: Mastercard Inc (not a credit card stock but a great way to learn the business)

We strongly encourage people interested in these stocks to learn about the fintech space that is priced like they are going to wipe all these profitable and established firms out. Our post on ARKF Dividend vs XLF Dividend is a great starting point in our view.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

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. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. 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 tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

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