The stock market has had a mini correction of late similar to the one we had in February. This one was spurred by a spike in bond yields that came about on a day of a good jobs report. This time around the fear is tied to the actions of the U.S. Federal Reserve.
More specifically, Wall Street fears the words of Chairman Jerome Powell. He sounded like he was dead set on raising interest rates regardless of the actual reports from the economy. In plain simple terms, investors are worried about the Fed overshooting in their rate rising efforts.
Bank stocks have not been able to rally this year but transacting companies like Visa (NYSE:V) are doing better. Visa stock is up 20% year-to-date and MasterCard(NYSE:MA) is up 33%.
Visa stock has had its ups and downs. In early October, V stock sold off 12%. It has recovered almost half of it already. The good news is that the stock is behaving well in relations to its pivot levels.
So today’s opportunity is a technical one that is based on solid fundamentals. Visa stock has a strong fundamental long-term thesis that is showing technical support. So going long the stock now is still a viable trade for the future.
Fundamentally, V is not dirt cheap especially when you compare it to American Express (NYSE:AXP). Visa stock sells at 40 price-to-earnings ratio. But V stock is well priced against is biggest rival MasterCard and they are both outperforming AXP so you get what you pay for. Even though Visa it’s not cheap, it is not bloated either.
These transacting companies have many more years to flourish. Our societies are becoming more dependent on online transactions than ever and this is a trend that is not likely to reverse. Amazon (NASDAQ:AMZN) proliferated it and now every retailer’s goal is to migrate their business online so they can compete with the Amazon juggernaut.
And then came blockchain madness fueled by the rise of bitcoin. But the excitement is really over the future of the technology behind the digital currency, which is blockchain. Just this morning I read a headline about Visa partnering with IBM (NYSE:IBM) to implement Ethereum technology on IBMs blockchain platform.
Every financial company is chasing the concept as nobody wants to be left behind. The movement of money electronically is the goal. And blockchain apparently can do it faster and cheaper than we’ve had it before. This still remains an uncertainty but for now Visa is in the game.
So Visa management looks like its firing on all cylinders in this new world of fintech.
There is event uncertainty coming this week with the Visa earnings report. So far the financials stocks have not had good reactions to earnings in spite of decent results. But that has been the case all year.
The prevailing belief is that the banks cannot rally even on good news and rising rates. It is a tricky environment for them, but it’s more straightforward for Visa.
The Bottom Line for Visa Stock
Visa stock does rally with traditional money centers, but it also has its own thesis that’s not simply tied to rates. There is short-term risk going into any earnings event, but in Visa’s case, I bet any negative reaction will be short lived.
Visa management is proven; they rarely give Wall Street specific reasons to sell the stock. Visa was the beneficiary of the American Express snafu with Costco (NASDAQ:COST). Visa cards are now the only credit cards accepted by the massive retailer. So going long Visa now, it’s comforting to know that I have solid management in a thriving industry that is sustainable for years.
The macroeconomic environment still favors the bullish thesis. But sentiment has flipped negative going into the US elections. So as soon as we clear that hurdle and find out more about the fed’s intention, markets should resume higher.
It’s hard to justify a hard stock market correction when the company P&L’s are this healthy. So until I see evidence of real deterioration in Visa’s businesses, I remain optimistic with short-term caution.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
