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Discover Financial Services (NYSE:DFS) was one of the early beneficiaries of the bullish response to the Trump presidential election win. The company’s stock price soared higher — gaining more than 15% — in the week following the election because the company had positioned itself to take advantage of any increase in consumer confidence, which came in spades after the election.
DFS made a decision a while back to focus on courting “revolvers” — those credit card customers who tend to carry a balance on their credit card from month to month — instead of competing with other card issuers for the highly coveted “transactors ” — those credit card customers who tend to pay off their credit card bills each month. The strategy came with its fair share of additional risk because revolvers tend to default on their debt more than transactors do, but when consumer confidence is high and the economy is growing, default rates tend to decline.
DFS showed with its most recent earnings announcement on Jan. 24 that the strategy is paying off. The company saw a large increase in both card loans and net interest income — up 6% and 9%, respectively — while the net charge-off rate only increased by 0.28%.
However, the announcement came at a time when Wall Street was taking some profits off the table in the financial sector as it waited to see where the market was going to go during the next few months, so the stock was unable to take advantage of the bullish news. But now that bullish animal spirits have returned to Wall Street, DFS is starting to jump once again.
Following a retracement during January, DFS is experiencing a strong support bounce up off of $68. We expect the stock to climb back up toward its recent high just above $74 and have chosen a strike price of $72.50 — which falls right in the middle of the consolidation range the stock experienced during the latter half of December. We think positive economic news, the company’s continuing share-buyback program and a renewed surge in the financial sector should all combine to push DFS higher.
‘Buy to open’ the DFS April 72.50 Calls (DFS170421C00072500) for a maximum price of $1.55.
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