MasterCard: Be Weary of Increased Supply

Echo To All submits: Monday, on Mad Money, Jim Cramer was pushing MasterCard (MA), saying that at these levels it is still a good investment. Basically his premise was that it will most likely see a short squeeze, and go up. (And I am sitting on my couch wondering how he can say this with a straight face.) A short squeeze does not make for a good investment.

MA is a great company, and there is no denying the importance of the service it provides. With the use of cash decreasing and the use of plastic increasing, MA has a great business model. However, they have a of PEG 1.64. That is pretty pricey. MA is experiencing great momentum and valuation has nothing to do with momentum, but supply and demand do.

Visa will become public soon, and I am sure the Morgan Stanley (MS) spin off of Discover will also hit the market sooner rather than later. With Visa and Discovery going public, the supply for stock in a credit card processing company will increase, forcing the current overpriced existing credit card processing companies to decline. If I am not mistaken, one of Cramer’s rules is to be weary of an increase supply.

The only existing public credit card companies are MA and American Express (AXP). Both are experience great performance but one is grossly overpriced due to an existing short squeeze while the other one is relatively pricey for a large cap.

So while a pop in MA may most certainly happen due to a squeeze, this is a trade not an investment - but if you have the risk tolerance for such a trade, by all means, play it.

(For the record, I love the business of these companies. If I had to choose between MA and AXP I would choose AXP. Iin fact I am waiting for a proper entry point to play AXP.)

Comments

[Sr. Pessimist:]

I see more and more security problems with electronic funds processing coming up. Anything dealing with currency transfers over wire is susceptible to a growing problem with the inherent weaknesses of modern encryption. Not only has it (prime factoring based public/private key encryption) never been proven to be unbreakable, serious flaws are being uncovered that make technology close enough to compromise security for more and more potential security attackers. Next year a cell phone could do what a desktop could do last year, and for 1/3 the price. A researcher recently found two distinct data that yield the same md5 checksum. Card processing will need an industry-wide conversion at some point, and I don't believe everybody is fully prepared. Could be months away, could be years.

2007 May 25 04:21 AM

[Echo To All:]

I think that is a 'doomsday' type of scenario, and highly unlikely. But with that stated whenever i do an electronic purchase i get weary, so on a personal level i fear it some.

On an industry level the processing companies use some pretty cutting edge stuff regarding encryption. (I do not know exactly what they use, as i am sure no one really knows out side key insiders, but i have read up a bit on quantum encryption and the like, and it is some interesting stuff.) but it is something they can never be complacent about, and if they remain vigilant (which they will as 'trust' is a key component of their biz model) the processing should be okay.

2007 May 25 08:01 AM