Minyanville contributor Sean Udall dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit www.minyanville.com.
I've taken a leg in the Ultra QQQ ProShares (AMEX: QLD). The market has popped 2% off lows, the question is will it pop the full 7%?
I'm seeing a few positive divergences and the percentage of stocks below the 50 day moving average is well below the 2002 levels. I haven't looked at the percentage of stocks below the 200 day, but I'm sure the reading should be equally distressed.
I know people are pricing in earnings per share Armageddon in tech land -- so the question is, what happens to many of these stocks if it's really just sort of "punk" and not a total cataclysmic drop in revenue guidance.
Can't say I'm a huge fan of Discover Financial Services (NYSE: DFS). Nothing against the company, of course, but when it comes to credit-card stocks, I'd much rather be aligned with either Visa (NYSE: V) or MasterCard (NYSE: MA). They make money on transactions at the register and don't have exposure to loans. With that bias fully disclosed, let me check out Discover's third quarter results, which the company discussed earlier in the week.
There really wasn't anything in the earnings release that made me want to buy the stock. Net revenues increased 8%, but earnings per share from continuing operations plummeted 27% to $0.37. Nevertheless, that was enough to beat analyst expectations by two pennies. The rough economy is hurting Discover. Charge-offs and reserves against them are negatively affecting the company.
Yet, there is an interesting litigation wrinkle to the Discover story as it relates to Visa and MasterCard. According to Bloomberg, some Wall Street experts believe that Discover may, at some point, settle its ongoing battle with the two card companies for $4 billion. It's a complicated situation, one centering on anti-competitive complaints. In the past, the major credit-card issuers wanted banks to deal with their cards only, effectively shutting out competitive forces. If a settlement isn't reached, then Visa and MasterCard may have to pony up billions more, since damages apparently could be tripled in this case if those two entities were to lose in court. That type of litigation news does represent a risk for those major card companies. Discover, no matter what, looks to be collecting a ton of dough at some point (it will have to share some of the windfall, Bloomberg says, with Morgan Stanley (NYSE: MS), which Discover was spun off from).
American Express (NYSE: AXP) closed at $37.43 Wednesday. Friedman Billings Ramsey says "Considering AXP needs to roll over 32% of its total managed debt (both corporate debt and securitized debt) within the next six quarters, we believe there is a risk there could be a material increase in the funding costs for AXP and thus materially reduce profitability." AXP overall option implied volatility of 48 is above its 26-week average of 45 according to Track Data, suggesting slightly larger price movement.
Capital One Fin'l (NYSE: COF) closed at $41.29 Wednesday. COF October option implied volatility of 76 is above its 26-week average of 65 according to Track Data, indicating larger price movement.
Discover (NYSE: DFS), an electronic payment services company, closed at $14.59 Wednesday. DFS overall option implied volatility of 63 is above its 26-week average of 60, suggesting non-directional price movement.
MasterCard (NYSE: MA) closed at $243.32 Wednesday. MA overall option implied volatility of 43 is near its 26-week average, indicating non-directional price fluctuations.
Visa (NYSE: V) closed at $74.57 Wednesday. V September option implied volatility of 42 is near its 23-week average, suggesting non-directional price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Visa (NYSE: V) is a favorite stock of mine. I really wish I'd owned it. I should have picked up shares on the last downturn ahead of its Q3 numbers, because the report that was issued on Wednesday was more gold than plastic, let me tell you.
Revenues increased 18% to $1.6 billion. That in and of itself is great growth, but there are other metrics surrounding the revenue story that stand out as well. Total payment transactions jumped 15%. Payments volume increased 19%. Total processed transactions soared 13%. And there was a 14% expansion in the number of Visa cards that are out there. And now, for the bottom line. Earnings per share came in at $0.59, which was $0.11 ahead of analyst expectations, according to Briefing.com. Debit cards and international exposure were drivers in Q3.
Like competitor MasterCard (NYSE: MA), Visa is a great investment idea because it isn't based on financial risk so much as it is based on transaction quantities. As the holidays approach, and as the economy softens, consumers may choose to use their Visa cards on trips to Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). In addition, consumers use cards simply for the sake of convenience. Whether used for financing or as a substitute for fiddling with cash at the point of sale, credit/debit cards should see increased usage over time. Visa's Q3, to me, shows that it is marketing its service properly, expanding upon its brand value, and benefiting from the economic malaise.
American Express (NYSE: AXP) saw a big sell-off in its shares during the after-hours session on Monday following the release of its second-quarter earnings numbers. The shares already closed down over 11%.
It isn't difficult to comprehend this one. According to Earnings.com, Wall Street was hoping for the credit company to make 83 cents per share. American Express only delivered 57 cents per share from continuing operations. Not only did the company disappoint the Street by a very wide margin, but it disappointed itself, since that 57 cents per share represents a 35% drop compared to the bottom-line results achieved a year ago.
Yep, the financial crisis is still with us. American Express needed to significantly add to its credit reserves. Management stated that the economy is having a negative effect on its cardmembers, and that previous guidance can no longer be relied on. Translation: don't buy this stock! At least, that's my opinion.
I simply can't see allocating investment funds to American Express at this point. If investors wanted to get some exposure to plastic, all they would need to do is consider Visa (NYSE: V) or MasterCard (NYSE: MA). Both of these businesses are based primarily on transactions, not on credit risk. Whenever a card is used, these businesses get a little cut. And that adds up, my friends. Granted, both of these companies sold off on Monday and have been weak lately, and they have litigation risk, but I'd at least look at them for the long-term. Over time they should do well.
American Express, however, is way off my list of potential investment ideas. Not even going near this one. Name a timeframe (e.g. year-to-date, one-year, five-year, etc.), and you'll find that the stock is down. The economy is going to have to turn sharply before I even remotely consider it.
Disclosure: I don't own any company mentioned; positions can change at any time.
A loss of confidence in the government sponsored mortgage firms Federal National Mortgage Association (NYSE: FNM), or Fannie Mae, and Federal Home Loan Mortgage Corporation (NYSE: FRE), or Freddie Mac, resulted in both companies shares plunging about 15% to 14 year lows. Because the two are the largest providers of funding for mortgages in the U.S., their troubles are significant as both may have to issue billions of dollars in stock to save themselves, diluting current shareholders, according to the Wall Street Journal.
For 75 years the NFL's Pittsburgh Steelers have been owned by the Rooney family, but that may now change as the Wall Street Journal reported that the family is seeking to sell the football team which is valued at about $1.2B. One potential buyer is Stanley Druckenmiller, a billionaire, and chairman of Duquesne Capital Management in Pittsburgh.
British Prime Minister Gordon Brown yesterday raised the issue of visa problems facing BP Plc (NYSE: BP) employees in Russia with Russian President Dmitry Medvedev, but Medvedev did not make any concessions on the issue, according to the Financial Times. Some people have suggested that BP's billionaire partners in its Russian joint venture, TNK-BP, have orchestrated the visa problems in order to gain control of the venture.
I love the long-term prospects of Visa (NYSE: V) and MasterCard (NYSE: MA), but I do have to concede that a pesky lawsuit by Discover (NYSE: DFS) is the one big fly in this story's soup. According to the following article, Discover wants both credit-card companies to pay $6 billion for perceived violations of antitrust regulations. Unfortunately, these damages could be tripled if Visa and MasterCard lose. One of the big problems here is that American Express (NYSE: AXP) already won a settlement of $2.1 billion from Visa late last year and the company established an escrow fund worth $3 billion for litigation payments.
I'll admit, this lawsuit does give me and my credit-card investment thesis a little case of the shivers. After all, tripling $6 billion to $18 billion means that a huge amount of money is in play here, and a successful outcome for Discover would hamper the stocks of the two big card entities. When you read through the litigation risks in Visa's SEC filings (out of MasterCard and Visa, the latter is my favorite since it is still relatively fresh off its IPO and MasterCard has already had a big run), they are pretty scary. And the fact that the $6 billion figure just came to light this week has probably soured the perception of some investors and analysts. Nevertheless, all the previous litigation talk didn't stop Visa's stock from taking off after its IPO earlier this year.
There is a great article on Visa (NYSE: V) and MasterCard (NYSE: MA) over at TheStreet.com. It talks about the incredible growth in prepaid cards. A prepaid card is one which has a certain quantity of stored value on it. Think of it as being similar to a gift card, except that a prepaid card can be used most anywhere. Both Visa and MasterCard want to capture as much market share for prepaid cards as possible because they offer the same revenue model as existing credit cards in terms of processing fees.
The wonderful thing about stored-value cards is that they represent the ultimate desire of the business economy: conversion into a cashless society. Not only does business want this, but so does the government, which will probably increase its use over time in terms of distributing monies such as unemployment benefits and social-security funds to individuals lacking bank accounts.
An important point made in the piece is the fact that prepaid cards will take a long time to reach critical mass and to become economically significant for Visa and MasterCard's bottom lines. This must be kept in mind, yet I have to say that I personally think prepaid cards could become more significant sooner than people think, assuming that the two big guns in this area buckle down and make some smart moves. Let me describe what I mean.
You know, I can't take much more of the financial crisis. That's because I own Newcastle Investment (NYSE: NCT) and CapitalSource (NYSE: CSE). I'm kind of hoping we get out of the mess brought on by the housing-bubble pop and the mark-to-market devaluation so that these stocks will rise again. As we continue through this recession, another problem may soon assert itself.
According to this article, consumers are starting to rely on their credit cards a little too much. This could lead to a larger quantity of delinquencies. In fact, the piece states that card delinquencies were at 4.86% in Q1, a multi-year high. Further, revolving debt increased 7.9% in March, coming in at $957 billion. Not too far away from a trillion, my friends. Let me tell you, this is the last thing we need right now. Delinquencies will become a major problem for the banks, leading to further erosion of confidence on financials by investors.
As can be expected, two ideas immediately came up during the course of the article: Visa (NYSE: V) and MasterCard (NYSE: MA). How could they not? If people are taking credit debt, then they must be using those two brand names. Since Visa and MasterCard don't really have exposure to the debt side of things, they are relatively safe from that aspect.
Visa Inc. (NYSE: V) is a worldwide retail electronic payments network. The firm owns and operates VisaNet, a global processing platform that provides authorization, clearing, and settlement services to some two billion card holders. Visa also licenses its name to member institutions, which issue and market their own Visa products and participate in the VisaNet system. The company went public in March of this year, pricing 406 million shares at $44 per share.
The stock popped last week, on positive brokerage remarks. SunTrust reiterated its "buy" rating on the issue and raised its target from $87 to $100, citing solid organic revenue and EPS growth prospects. That sparked a run to the upside in V shares, which was subsequently magnified by word of a bullish outlook from rival Mastercard (NYSE: MA). The move was accompanied by heavy interest in Visa call options, particularly the June $85 instrument.
MasterCard (NYSE: MA) is recently up $25.91 to $312.80. MA raised its long term financial goals and expects double digit net revenue growth for 2008. MA May option implied volatility of 39 is below its 26-week average of 43 according to Track Data, indicating decreasing price risk.
Visa (NYSE: V) is recently up $3.21 to $85.20. V call option volume of 72,103 contracts compares to put volume of 10,196 contracts. V June option implied volatility of 48 is near its nine-week average of 45, suggesting non-directional price uncertainty.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Credit cards ... the little plastic cards in your wallet that are so convenient to rely on when you are strapped for cash. While the convenience of having cards definitely makes it easier to buy items when you are running low on cash, the flip side is that credit card debt can drown the typical household, and statistics are showing that Americans are pulling out their cards more than before.
One of the reasons why credit card usage has been on the rise is the fact that homeowners are having a harder time using home equity to get a cash infusion into their accounts. As a result, they are looking to borrow money from somewhere, and more times than not, they are turning to credit cards.
The evil with credit cards is that once you start to use them to pay for your basic necessities like food and gas, you find that in the months to come you still can't afford your basic needs but in addition, your monthly bills are racking up like crazy due to your credit card expenses. It's a scary cycle that many families find themselves trapped in.
MOST NOTEWORTHY: Learning Tree, Shengdatech and Cepheid were today's noteworthy initiations:
B. Riley initiated Learning Tree (NASDAQ:LTRE) with a Buy rating and $24 target. The firm believes investors have an opportunity to invest in a compelling revenue growth/margin expansion story at reasonable multiples with the stock off recent highs.
Merriman started Shengda Tech (NASDAQ:SDTH) with a Buy rating and points to the company's growing nano-particle business and the vast market expansion opportunities associated with this business.
Stephens believes Cepheid (NASDAQ:CPHD) possesses a best-in-class platform for molecular diagnostic testing with a virtual monopoly in the molecular point of care market; shares were assumed with an Overweight rating and $32 target.
OTHER INITIATIONS:
Visa (NYSE:V) was started at Morgan Keegan with a Market Perform rating.
Morgan Stanley initiated Dr. Pepper Snapple (N YSE:DPS) with an Equal Weight rating and $30 target.
Goldman initiated Kraft Foods (NYSE:KFT) with a Neutral rating.
Minyanville contributor Sean Udall dares to share the kind of keen insight and actionable information you won't find in any prospectus. For more original thought, visit www.minyanville.com.
Can't say I'm a huge fan of 
American Express
Here are some highlights from this past week's 
Visa (NYSE: 
.gif){kind=logo}
I love the long-term prospects of 
There is a great article on 
MasterCard .gif){kind=logo}
Here are some highlights from this past week's 
The Wal-Mart Weekly: Retailer accused of sweatshop conditions in Bangladesh
Fog clearing - maybe. Clear skies - no! GE, JNJ, MRK, PG, RTN, WFC
Cramer on BloggingStocks: A fighting chance for the credit markets.
