MasterCard And Visa Will Continue To Outperform The Market

Includes: AXP, DFS, MA, V
by: Benjamin Goldman

With how bearish the market has been lately, it's hard to imagine that two financial services companies, MasterCard (NYSE:MA) and Visa (NYSE:V), have been performing so well. In the last three months, MasterCard shares have gone up by 31.05 percent while Visa shares grew by 25.37 percent. During this time, the S&P 500 has dropped by 5.96 percent. Even though these two stocks have seen spectacular growth, I believe that there is still time for investors to invest in MasterCard and Visa and make a nice return.

What makes payment services a hot industry to invest in is the increasing use of credit cards by consumers. With digitalization and globalization taking over, paying with a credit card will continue to become cheaper and easier. Investing in MasterCard and Visa is a long position in new age technology in a very stable industry, which makes them very unique and explains their bullish performance.

From a P/E valuation standpoint, MasterCard with a P/E ratio of 22 and Visa with a P/E ratio of 21.75 appear to not be good value buys. However, they are very solid companies and will trade at higher P/E ratios as they begin to be viewed more as new age technology companies, which can trade at very P/E ratios.

You may be wondering why I am only recommending to buy MasterCard and Visa, but not American Express (NYSE:AXP) and Discover (NYSE:DFS). American Express differs from MasterCard and Visa in that American Express participates as the Acquiring Bank, Issuing Bank, and Network parties in most of its credit card transactions, where the Network side is the only party that benefits from the current trends. MasterCard and Visa are the two largest networks in the world and stand the most to gain. Discover also has a good network, but it is only fourth in the industry and I believe that investors will flock more towards the two leaders. For example, while MasterCard and Visa have performed so strongly, Discover Financial Services shares have increased by 13.41 percent in the last three months, which is relatively lower.

Of the 31 analysts rating MasterCard stock on Yahoo! Finance, 16 recommend Strong Buy, 9 recommend Buy, and 6 recommend Hold. Of the 31 analysts rating Visa stock on Yahoo! Finance, 17 recommend Strong Buy, 10 recommend Buy, and 4 recommend Hold. Of the 188 stocks that my stock rating algorithm analyzes, MasterCard and Visa rank second and fourth, respectively.

My algorithm disregards analyst recommendations and past performance, which shows how MasterCard and Visa look like great buys from so many different angles. As consumer confidence recovers from the 30 year low in an August 12th report, expect to see MasterCard and Visa stay bullish.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.