Why I'm Still Out of Mastercard and Visa

Visa (V) was the biggest IPO in US history when it began trading back in March.  On April 3rd I highlighted the breakout and initiated my first position in the company after it broke out of a very bullish looking triangle formation. 

http://selfinvestors.com/si/visabreakout

Less than one month later, after vaulting more than $20 bucks, I decided to lock in my profits.  Way over hyped, way overbought.  At 9:09AM on April 3rd I sent the following to my Gold & Platinum members:

 

(04/30/08 9:08:58 AM): Ok, I'm going to go ahead and take profits in Visa (V). Lots of giddy people out there with big Visa profits, but this is a stock that is WAY overbought. Considering we are still in a bear market and I'm up 30% in just a couple weeks, I'll take the gift and sit tight for awhile. I really believe I can get back in at a significantly lower price, particularly when the lock up period expires and this market pulls back. If you're a long term holder with a multi year time horizon it probably makes sense to ride it out. I am not. I trade based on current market conditions and the
action in individual stocks over a shorter time period. I'm avoiding the greed in Visa and out at 83.67 as it breaks the bullish formation on the 5 min intraday chart.

 

As it turns out, the stock ramped up another 6 bucks or so before the run died and it spent the next two months carving out a large, bullish wedge formation.  One day before the holiday, on July 3rd it broke that bullish formation setting it up for a much larger cup base which it is forming now. 

I haven't had time to analyze the earnings reports of both Visa and Mastercard (MA) but I know how the market reacted.  Despite beating EPS estimates, both were hit hard on heavy volume setting both up for a deeper correction.  These companies are absolutely not immune to a faltering economy and until the deceleration of growth in both earnings and revenues for both companies stabilize, it pays to watch on the sidelines and wait for the next base to form. 

Disclosure: None

Comments

[tuskagee:]

Yawnnnnnn, I'm going back to sleep now.

2008 Aug 03 10:04 AM

[Neema:]

At what prices would you buy Visa at? What's your prediction?

2008 Aug 03 10:15 AM

[ksmithdc:]

Find something else to invest in, perhaps something more ethical than credit cards (which are a primary source of financial ruin for Americans) . What are up to now? $3 trillion in debt? Somebody needs to reign in the credit card companies before we all are slaves to them.

2008 Aug 03 10:54 AM

[investor88:]

In these highly uncertain markets, I agree with Tate that Visa and Master is not a sure trading bet with the slowing/recessionary economy bound to affect these companies going forward.

2008 Aug 03 11:09 AM

[Tony Rand:]

All in, Americans are carrying in excess of $11 trillion in debt (secured and unsecured). If more than $6 trillion is secured, look for the more than $5 trillion in unsecured debt to be annihilated when the economy continues to slide over the edge of the cliff.

2008 Aug 03 11:32 AM

[jdl51:]

I'm amazed at how many people think V and MA are susceptible to credit card debt. These companies are facilitators only. They make their money only from the transaction fees that they charge the banks who hold the credit card debt. They do not hold any debt and never will. With the steady increase of debit and credit card usage worldwide their revenues will only increase. They got hit last week because of a lawsuit against them by AMEX and Discover Financial. V has set aside funds for the settlement, but MA did not and that brought them both down. Expect both of these companies to be an excellent long term investment.

2008 Aug 03 11:43 AM

[bearfund:]

ksmithdc, what exactly is unethical about these companies? They don't issue cards and they don't extend credit to individuals. They are not the people suckering in grandma with zero-interest offers and then punching her in the gut with 2-cycle billing, 30% interest, and universal default (and, frankly, this isn't even unethical in my view - these terms are clearly spelled out in every offer; if you don't like them, don't take the card!). V and MA are nothing more than financial plumbers. They process payments and collect small fees from them. And before you start talking about how ubiquitous credit has doomed people ill-equipped to service such large debts, remember that these companies do the same things for debit payments that they do for credit. A wholesale and abrupt end to the individual credit regime would only harm these companies to the extent that overall transaction volume would decrease (i.e., that people can't actually afford the purchases they currently make and would have to cut back) - it's unlikely that many people will suddenly switch from plastic to paper. If you have an ethical problem with these guys, it should be over antitrust considerations - which have already cost both companies dearly.

2008 Aug 03 01:15 PM

[Urbane Gori...:]

JDL51...

If anyone reads at all, they will have heard (many times over) that V and MA are facilitators only. This is not news. The theory has been pushed forth that Americans have been hurt by the economy and therefore will start using their plastic more. And, if there is a downturn, any slack in performance will be more than made up for it by expansion in foreign markets.

There are potential flaws in this theory:

- When people lose jobs and income, eventually, they lose the use of their cards. (Just speak to my daughter..)
- Depending on where the cards are experiencing growth, there is the threat of the same situation there. (Just look at the financial problems in Ireland and GB right now... )
- And of course, there is always the old 'whatever goes up must come down.)

That's not to say that I expect either to be a bad investment in the long or short term, just that people seem to read a good line and not consider all the issues surrounding it.

jegan ;-)

2008 Aug 03 02:56 PM

[George Bows...:]

I would still buy either. Remember, spending on discretionary items may be down. However, many other things are used with the VISA and Mastercard cards. For example, paying bills online as well as necessary items (Utility Bills, mortgages, etc...). I still think both have room to grow. Ignore the stock price and look at the fundamentals

2008 Aug 03 03:47 PM

[Fedex11:]

I have MA calls and V stock both imo are very solid

2008 Aug 03 04:04 PM

[scoob:]

buy long and write covered calls...5% to 7% per month adds up at the end of the year.

2008 Aug 03 06:52 PM

[Kunst:]

What jegan said. It ain't news to anyone that V and MC don't carry the debt themselves. But they are susceptible to an economic downturn because they effectively get a percent (actually more like 2%) of the total volume charged on their cards. Between spending cutbacks in general and increasing financial distress, there is every reason to expect that volume to decrease. And don't count on overseas to counter US weakness. It may to some degree, but the economic problems are not limited to here.

2008 Aug 04 01:51 AM

[abh:]

Even if the ecomony slows, V and MA make their 20 cents on each transaction even if that transaction is smaller that it once was. So they make the same 20 cents on $25 worth of gas as they do on $50 worth of gas... In other words, the only way their bottom line gets hurt is when there are fewer transactions. The way I see it, people will make almost the same number of transactions as they ever did, but spend less money on each one (i.e. cheaper clothes, cheaper food, cheaper hotel rooms, etc...) and with the growth oversea of the use of plastic, transaction volume is most likely going up!!

2008 Aug 04 02:17 PM

[abh:]

V and MA don't make the 2%. The banks do. It's what covers their risk. V and MA only make 20 cents per transaction. But those 20 cents sure do add up...

2008 Aug 04 02:17 PM

[User 172125:]

Tate- you must not be a trader- and it is wise to capture profits and buy on dips. Had you been doing so on V you would have had several opps to generate quick profits. Instead of making money once on V you could have done so several times.

I don't know what to make of this article as it really doesn't make much sense. We are in a BEAR market. This is why V was not able to break out.

For anyone that invests in V- or trades V shares and/or options-leaps come check out our Visa Blog.

www.visawinners.com

2008 Aug 04 03:03 PM

[mrbill for V:]

Tate: Do you know why a gambler never wins? He always gambles the winnings and forgets the profits! Do yourself a favor and buy V now and hold it for your future, if you know what dollar cost averaging is try it.

2008 Aug 04 08:53 PM

[User 172125:]

Mr. Bill- You and I are in agreement that now is a great time to buy V.

I think our friend Tate is patting himself on the back for selling V shares BEFORE THE WORST JUNE IN OVER 75 YEARS. Tate I looked at your blog and you obviously have a lot of ideas- but don't pat yourself on the back just yet.

MA is the stock to stay out of- see my blog for many of the reasons- but the stock is 'out of favor' with traders - and I told people to watch out a couple of months ago when money flow (inst) was exiting MA and entering V.

The reason V did not react to earnings- is, again- WE ARE IN A BEAR MARKET!!! Do people just not get this??

V is a great company, has a great business model -and is a wonderful company with an incredible future. They are developing so many revenue models and payment modes that their success is assured.

If you are considering buying V - now is a great time. Just about the only way professional traders are making money is SHORTING stocks right now- if you looking for a quick pop- good luck. BUT- if you want a great long term company that will weather the storm-V is a great buy at 72.50

www.visawinners.com

2008 Aug 04 10:47 PM

[truthinvesting:]

YOu were smart taking your money and looking for something priced better.My free website has documented my winning blue chip investments and After a certain point between 7 and 43% I have locked profits. Good article

2008 Aug 05 09:07 AM

[User 172125:]

Yes- truth in vesting- It is smart to take profits, buy on dips, trade on bear rallies- now tell us something a 17 year old doesn't know.

One thing I can't figure out about so many of you is why you can't wrap your arms around the safety net that V offers instead of taking uneccesary risk trading a 'fad' stock like an IPI.

If, all you had done is buy and sell on every 5$ price movement on V since day one- you could have easily had 50 solid (and easy trades) under your belt. Is anyone naive enough to think the floor is going to fall out on V- and suddenly the shares will be trading in the 50s??

Once again- we see a post about a one hit wonder while ignoring the fact that you have a solid base from which to exprerience multiple profits without the risk associated with many of today's sectors (tech/energy/banking/m...

2008 Aug 05 10:31 AM