Visa: Heads I Win, Tails I Break Even

Includes: MA, V
by: Robert Weinstein

Thursday, Visa (NYSE:V) was slammed hard when the Fed, following its new mandate to reel in debit card fees, purposed that the fees be cut by about 75%. In the past three days, Visa gave up almost 20% of its value, with a discount in the price of the stock of about 13% on Thursday alone. It appeared that the panic selling was in full force as the volume being traded jumped from around seven million shares a day to about 50 million.

Mastercard (NYSE:MA) dropped less, and with the higher price of the stock, it appears to me that the smarter money didn’t get shaken out of their stock as easily. MA was down less than 10% Thursday even with a big ramp up in trading volume. MA really gives me the green light to buy V and or MA and I picked V to buy Thursday. With a forward FY2011 P/E of less than 20, this became a nice stock to put in the holdings.

For me it may be easier than for some, but I like to buy good stocks when they are beat up. Buying a stock just because the price is lower can be a formula for being a bag holder, but when you get to buy a name like VISA at the discount offered Thursday, you have a chance to really make some money.

As a global company with exposure to every major market in the world, I think one needs to have tunnel vision to let go of their V stock due to some purposed rules by the Fed. I believe that even if the Fed does enact the worst case rules that it will have to work its way through the court system and could take a very long time before any impact would be felt. Also, the numbers could and I am betting will, change significantly before anything is put on the table.

While debit card processing is a growing part of the business, nothing is being purposed to change or cap the interchange fees for credit card processing. If caps are put into place, this surely does not mean that V will not be able to recover some of the revenue in other ways.

If the worst case drop in the debit card fees does not happen, Visa should pop up hard and fast just as it did after the Frank-Dodd bill was passed; and if the worst case does happen, I think the drop in earnings are more than priced in. Basically, heads I win and tails I break even (or better).

What's interesting as well to me, is the same government body that put V on sale Thursday also gives me the view that V is a good company to be holding right now. With QE2 in full force and with low interest rates for as long as the economy is down, it's hard to not believe that the rising tide will not float this boat higher as well.

The time to buy was Thursday for me and looking at how the price jumped up higher in after hours trading as soon as MA released their press release, tells me that at least for now, the panic is officially over. V jumped in price over 60 cents in about 10 minutes, but more importantly, is the growth and profit potential in 2011 and beyond. This is where I feel V really shines compared to some of the banks that also have revenue gained in merchant services.

V also pays an expected 60 cents next year in dividends, which I find makes a stock really add value. I like to own for a hold two kinds of stocks, those that are expected to move up very quickly a large amount and those that pay you to own the shares. V has over $5 per share in cash on hand and currently over 12% year over year growth rate. With internet commerce growing not only in the United States, but around the world, it's not difficult for me to see what a value V has become.

One method of being able to get some V stock and lower the risk is buying V and then selling calls against the shares bought. V is big enough that selling naked puts makes about the same sense as well (I think call writing makes more sense than naked puts for most stocks due to liquidity spread costs). This is exactly the method that I used to be able to hold V for a longer period. I sold some Calls against the V that I bought Thursday, but did not want to totally limit myself so I did not sell as many calls as I had shares to do so with. I know some have said it could take a day or two for this to settle out before retracing but I don’t buy that theory. In my opinion, V was way oversold based on panic selling and while V may be under some pressure it is also option expiration day on Friday and I believe that will create a lift under V. I will be holding some of what I bought today for a longer term hold because of the price I was able to buy the shares at and I wrote calls against some which will pay me to hold the shares day after day.

Disclosure: I am long V. I plan on buying more shares into weakness going forward