As we enter 2011, there are two “big picture” economic themes that will play out over the new year and beyond. These are macro trends for the stock market that I see as “recession proof” — or at least highly recession resistant.
The first theme is one that I have been following in the Sizemore Investment Letter since early 2010—the rise of the Emerging Market Consumer. While many emerging countries—most notably China—remain dangerously dependent on exports to America and Europe, tens of millions of formerly rural peasants across the developing world are quietly settling into life as urban middle-class consumers. Their rising standards of living create an excellent long-term opportunity for Western investors who can find ways to tap into it.
The second theme is the secular shift to a global cashless society. Though the process is well on its way in the United States and Europe, roughly 40% of all transactions are still made with cash and paper checks according to Barron’s. This means that even in “boring” developed markets, there is ample room for growth in electronic payments.
But of course, the biggest story is in emerging markets. Those up-and-coming consumers I mentioned in the last paragraph will be making an increasing percentage of their transactions using credit, debit, and assorted prepaid cards in the years ahead. There is no better company to benefit from these trends than credit card giant Visa Inc. (NYSE: V).
When I mentioned that I was considering this stock as a recommendation, the response from one of my colleagues was rather blunt: “Have you lost your mind? You’ve been writing for two years about the American consumer being in debt trouble, and now you’re recommending a credit card stock?”
Indeed I am. But the truth is, Visa is not really a “credit card stock,” per se. It’s really a brand-management company that controls a sophisticated—and highly profitable—electronic toll road. Visa is not a bank and takes no credit risk to speak of; that is the job of the banks that issue cards branded with the Visa logo. Visa makes its money by charging banks service fees for the use of its Visa brand and its global electronic-processing network for credit and debit cards.
I know what you are thinking. The developed world remains mired in a deep consumer recession. Less consumer spending means fewer card swipes — and less revenue for Visa. That was my initial thought too, but total electronic payments have risen more than 30% in the last two years, despite being one of the worst consumer economies in history. Yes, the move to a cashless economy is very real, and Visa stands to be one of its biggest beneficiaries. It doesn’t hurt either that Visa is an “Emerging Market Lite” investment — 40% of its revenues come from abroad, and much of this is from emerging markets in Asia and Latin America.
As this article is going to press, the Federal Reserve just made quite a splash by recommending a rather draconian cap on the fee that banks can charge merchants for accepting debit cards. In response investors punished Visa and rival card company MasterCard, sending shares down more than 10% in one day.
At this stage, I believe the market is overreacting and that the effects of the Fed’s recommendations—which will likely be revised before they are finalized in April—are more than fully reflected in the current stock price. The market got spooked by the Fed’s announcement and reacted by pricing in a worst-case scenario. What this means for Visa investors is that anything even slightly less bad than the worst case scenario should cause the stock to rally substantially. I’ll write a more in-depth analysis of the Fed’s recommendation next month.
If I had to limit my portfolio to just one stock for 2011 it would be Visa, hands down. It is a conservative company with durable competitive advantages that just happens to sit at the crossroads of two of the most significant macro trends of the next decade.
Check out the other FREE stock picks that make up InvestorPlace.com’s Top 10 Stocks for 2011.
Charles Lewis Sizemore, CFA, is editor of the Sizemore Investment Letter.