I have recently begun writing my take on certain companies based on long-term outlooks. Often times, I write about using options to capture short- to intermediate-term moves that I think equities will make. However, I have decided to write about the long-term holdings of a potential young person's portfolio. The portfolio covers a variety of stocks and ETF's, while focusing on diversification and growth. Today's stock I want to write about is Visa (NYSE:V).
Visa is a major credit card company, which has experienced major growth over the past several years. The chart looks very healthy, especially when you add in the moving averages. Moving averages can help determine the overall direction of the stock, aiding investors in spotting the trend. Below is the 3-year chart with the 50-day, 100-day and 200-day simple moving averages:
In fact, when you look at it, this is one of the best charts you can imagine! There has been no parabolic price action, as Visa has risen slow and steady over the years. Lets go over some numbers and key figures before discussing further. First, lets look at revenue growth, one of the most important factors in a growth stock. Below we'll look at revenues for the previous three years (2009-11), the current year (2012) and the future two year estimates (2013 and 2014):
Revenues (in millions):
Change In Revenues ($)
Change In Revenues (%)
(*) = Indicates that these numbers are estimates for the fiscal years of 2013 and 2014.
As we can see in the table above, revenues have managed to grow in the 10-15% range for the last several years, and are forecasted to remain that way. The thing I like about the growth is its consistency. The 10-15% isn't an average, something some investors tend to do that I don't care for. When you average the growth, you distort the actual figures, which will tell you what kind of company this is.
For example, you could have a company that has experienced annual growth of 8% for four years, and had 100% growth in the fifth year. This company is consistently growing around 8% a year, but has an average growth rate of 26.4%. See the difference? While it can be extreme, a company like Chipotle Mexican Grill (NYSE:CMG) has highly distorted growth averages.
While you could average Visa's growth due to the consistency and still get a fairly well-represented figure, you don't have too. One look at the table above is all you really need. Next, lets look at earnings per share growth (NYSEARCA:EPS).
Earnings Per Share:
Earnings Per Share
Change In EPS ($)
Change In EPS (%)
Unlike revenue growth, the consistency isn't as clear when looking at the EPS growth. The next few years are projected to grow in the double digits, which is promising to see as an investor. While both revenue and EPS growth is projected to remain in the double digits, it's important to remember that it's just that, a projection.
Growth is obviously the most important thing when considering a growth stock, but there are other metrics that should be focused on as well when making your selections. Some key aspects are listed below:
- Market cap of $80 billion
- Dividend yield of .85% with an annual payout of $1.32 (quarterly payout of $.33)
- (NYSE:TTM) P/E Ratio of 48
- (FTM) P/E Ratio of 18
- No long-term or short-term debt
- 5-year PEG ratio of 1.07
While the (TTM) P/E ratio is rather high, at 48, the forward P/E ratio is quite low at 18. This suggests that Visa is not overvalued, even though a quick glance at the trailing P/E ratio would make you think so. To back this up, we have the 5-year PEG ratio. The PEG ratio measures the company's growth relative to its valuation, or to its P/E ratio.
A PEG measurement of 1 suggests the stock is at fair value, relative to its growth. Below 1 is considered an undervalued stock, while a measurement over 1 is considered an overvalued stock. With a reading of 1.07, this suggests that Visa's stock price is fair, relative to the expected growth.
I also think it's important to see a big goose-egg in the long-term debt column. The fact that Visa doesn't have any long-term debt really helps when trying to select a quality growth company for the long-term. Nothing is better than pulling up the balance sheet for a company you're interested in, and finding a big, fat "0" where the long-term debt belongs. Visa becomes increasingly more enticing when you note that it pays a dividend. Although small, yielding less than 1%, it's a dividend nonetheless.
Many investors only view options as a way to play short- to intermediate-term trades on equities. But they can also be used for long-term moves as well. One way to do so is by using LEAPs. When you purchase LEAPs, they typically expire in one to two years. LEAPs can be a good way to use a smaller amount of capital while still gaining exposure to the future movements of Visa. A look below will show us how this works:
100 shares of Visa = $15,677
Max Risk: $15,677
1 January 2015 100 strike call option @ 60.25
Net Debit (Max Risk): $6,025
Days Until Expiration: 740
With 100 shares being callable at $100, this has over $56 of intrinsic value built in to the option premium. More intrinsic value means less time value, and in this case there's only $348 worth of time premium built into it. Not bad for an option expiring in two years. Not only that, but this specific call option costs much less than the 100 shares of Visa, currently valued at over $15,000. At just over $6,000, this LEAP only costs 38% of the price that the 100 shares cost.
However, there is more than one way to use options as part of a long-term strategy for specific stocks. Put selling. By selling cash-secured puts, you are entering an agreement to buy 100 shares of a security at the strike price. Say you wanted to own Visa around $150. Instead of waiting for Visa to fall back to $150 -- which it may never do -- you could sell the February $155 put for $355. Below is a further look at the investment entry:
Sell 1 February 155 Put @ 3.50
Net Credit (Max Gain): 3.50 $350
Days Until Expiration: 40
Cost Basis (If Assigned): $151.50
If in 40 days, Visa is below $155, you will be assigned your shares. As you can see from the outline above, the effective cost basis (when the premium is added) is $151.50. This is about $5, or 3.2% below Friday's closing price. Either way, both of these strategies gives the option user significant exposure to Visa and its future movement. The put-selling is more long-term, assuming the shareholder doesn't sell the shares after assignment. It also depends on if you're looking for 1-2 years of exposure, or potentially many more. You could always exercise the LEAPs near expiration, to continue receiving exposure.
Essentially what we have here is a company growing revenues in the double digits, with no long-term or short-term debt, that pays a small dividend. The kicker? The charts are nearly as perfect as can be, especially with everything that equity markets have been through in recent years. I am bullish Visa and think the long-term prospects will continue to deliver results like we've seen above.