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Credit or Debit? And Which Card Stocks Stand to Benefit?

Card stocks get another look after recent trend reversal

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But with respect to the debit/credit issue in the United States, MasterCard finds itself in a better position. MasterCard has a much larger percentage of its card portfolio in credit rather than debit. Still, it’s difficult for me to choose one over the other; both are high-growth, high-quality companies backed by unstoppable macro trends. And as investors, we don’t have to choose. We can own both, and that is exactly what I recommend you do.

Another option might be to go with credit-only card issuers American Express (NYSE:AXP) or Discover (NYSE:DFS). With no exposure to debit cards, these two would seem to have nothing to lose and everything to gain from a shift in consumer preference for credit over debit.

Investors need to do an extra layer of analysis on these two, however. Unlike Visa and MasterCard — who make money by processing transactions and take no credit risk — American Express and Discover are banks and come with all the risks inherent in that industry. Furthermore, as the premier business card, American Express is more closely tied to the state of the economy than Visa or MasterCard. And Discover, as the smallest player in this game, faces a brutal competitive environment.

This is not to say that either is unattractive, per se. American Express is the closest thing to a “luxury good” in the card universe, and Warren Buffett likes the company enough to make it a core holding of Berkshire Hathaway (NYSE:BRK.A, BRK.B). And Discover easily is the most attractively priced of the group at just seven times earnings and two times sales. Discover also has a large student loan portfolio and tends to target younger consumers with short credit histories. This is a positive during boom times but a disaster during busts.

If you are a conservative investor betting on long-term trends, stick with Visa and MasterCard. But if you believe the U.S. economy will significantly improve in 2012, American Express and Discover are likely to outperform their non-credit-risk-taking rivals. Just hope the Occupy Wall Street crowd doesn’t persuade Discover’s college student customers to revolt!

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. Sign up for a FREE copy of his new special report: “Top 5 Contrarian Stocks for 2012.” Visa is a recommendation of the Sizemore Investment Letter and is held in Sizemore Capital client portfolios.

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