With the first quarter of 2011 drawing to a close, Visa (NYSE: V) investors are watching the Federal Reserve and Congress for hints of what to expect for the rest of the year. Markets hate nothing more than uncertainty — stock prices often respond better to confirmed bad news than they do to ambiguity — and the uncertainty surrounding the proposed debit card fee cap from the Fed has weighed heavily on both Visa and rival MasterCard (NYSE: MA).
The cap, which was required by the Durbin Amendment of the Dodd-Frank financial reform law, would cut debit card fees by 75% if implemented. The banks issuing debit cards — incuding Bank of America (NYSE: BAC), Citigroup (NYSE: C), Wells Fargo (NYSE: WFC) and other major financial stocks — would take most of the hit. But the actual affect on Visa and MasterCard is unknown and still a matter of debate.
It is safe to assume, however, that the impact would be felt. Banks would almost certainly scale bank debit card promotions and would likely start charging fees to cardholders. And while shoppers used to the convenience of plastic are unlikely to ditch their cards in favor of cash and paper checks, Visa and MasterCard’s explosive growth rates would likely come back down to earth.
For now, the tide appears to be turning in favor of Visa and MasterCard. Fed Chairman Ben Bernanke announced on Tuesday that the Federal Reserve will not meet its April 21 deadline for issuing a final rule on the matter, conceding that “The issues raised are complex and difficult and are significant to the payments system, its providers, and its users.” Bernanke himself has questioned the wisdom of the fee cap, doubting if it will achieve its objective of lowering retail prices for consumers. The longer the Fed’s decision is delayed, the more likely it becomes that it will never be implemented.
Meanwhile, Sen. Jon Tester recently introduced a bill calling for a two-year delay of the fee cap and a one-year study in that period of the effect of the proposed limits.
It remains to be seen how this high drama will play out. The Durbin Amendment has powerful enemies, including the banks, various consumer groups, Fed Chairman Bernanke, and numerous senators and congressmen. But it also has powerful friends, including Wal-Mart (NYSE: WMT) and other large retailers and a handful of influential senators — including Dick Durbin, for whom the amendment is named.
Investors can take advantage of this period of uncertainty by accumulating shares of Visa stock. Regardless of what happens in the corridors of power in Washington, Visa sits at the crossroads of two powerful macro trends — the shift to a global cashless society and the rise of the emerging market consumer. These are two reasons I said to buy Visa stock back in December, as one of InvestorPlace.com’s Best Stocks for 2011. Visa also has no debt and happens to trade at a very reasonable 12 times expected earnings.
Visa remains a strong “buy” and one of my favorite picks for 2011.
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.
