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.
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.”
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.