Choppy Market Action Exposes Attractive Entry Point For This Bellwether Leader

Aug. 23, 2013 8:14 AM ET
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By Mitchell Clark, B.Comm. for Profit Confidential

The best companies the stock market has to offer rarely go on sale. But when they do, you have to make a determination as whether there's been a fundamental change in the long-run prospects of an enterprise. If there hasn't been a change, then that company is worthy of serious consideration.

One such company that's been an excellent wealth creator on the stock market and has recently pulled back from its high is Visa Inc. (V). The position crossed below its 50-day simple moving average (MA) at the end of July and is just a few points away from hitting its 200-day simple MA.

Prospects for Visa haven't diminished. Wall Street has been consistently increasing its earnings outlook on the company for this year and next.

Both Visa and MasterCard Incorporated (MA) trade similarly on the stock market. While Visa is the larger company by market capitalization, both positions are off their highs.

Now is a good time to put Visa on your radar for a number of reasons. The position isn't down from its high very often-let alone being down to this degree. Business prospects for the company haven't changed. It's the lull between earnings seasons, and the marketplace is worried about a reduction in monetary stimulus. For long-term portfolios, Visa is a good pick to consider.

The business of credit cards is a good one. In its fiscal third quarter of 2013 (which just ended), Visa's revenues were $3.0 billion, up markedly from $2.57 billion in the comparable quarter. Plus, the company is highly profitable, generating earnings of $1.23 billion last quarter, compared to a loss due to a litigation provision.

The fastest growth the company is experiencing is in transactions outside of the U.S. market. International transaction revenues grew 14% to $854 million in the latest quarter. Total operating revenues this year are expected to grow approximately 13%. Adjusted earnings-per-share (EPS) growth in 2013 is expected to be in the low 20% range. Management recently affirmed its previous full-year outlook.

So business prospects for Visa haven't changed, but the stock is off its high by approximately 20 points.

No doubt, this position's due for a correction. It's been running strong since 2011. Regardless, this company is an awfully good business, and it has proven in the past that it's never off its highs for very long. (See "Will a Return to Normalized Interest Rates Halt Economic Growth?")

Those investors with an interest in this kind of enterprise may want to consider following the stock now. If it continues to pull back, the company will soon become a value with a current forward price-to-earnings (P/E) ratio of just under 20.

I would say, however, that I don't like the trading action of this stock market. Until recently, the action had a good amount of conviction; now, there's an undercurrent of worry about what the Federal Reserve is going to do with its monetary stimulus.

So while a company like Visa is very much a business worth keeping an eye on, I'm not an advocate of doing much buying before there is certainty from the Fed regarding monetary policy.

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