Amid the recent stock market rout, the only survivors have been defensive stocks. Many headline consumer staples names have rallied to all-time highs. Utility stocks have out-performed. Big yielding stocks have also done better than the market.
But, pretty much all other sectors have been victims of what the market thinks is a coming recession. If this recession does come in 2019, then all these stocks will remain weak. But, if 2019 turns out to be a minor slowdown like in 2015-16 and not a recession, then many of these stocks could rebound.
At the top of RBC’s list of stocks that could rebound in 2019? Payments stocks.
In a recent note, RBC notes that payments stocks are broadly supported by healthy profit growth trends, and that these healthy profit growth trends should more than offset multiple compression. As such, RBC sees payments stocks as being out-performers in 2019.
Which payments stocks in particular? Let’s take a closer look.
Of course, any list of payments stocks must include global payments giant Visa (NYSE:V).
Visa is the unrivaled king in the global payments world. This is a $300 billion company that is built on secular growth trends in financial consumption. Quite simply, the more consumers consume financially, the bigger Visa gets and the higher Visa stock goes.
From this standpoint, Visa stock should do well in 2019 so long as the underlying global consumer economy remains healthy. Right now, consumer sentiment and confidence are still near all time high levels, especially so in the U.S. So long as current market turmoil remains contained to the financial markets and doesn’t spill over into the consumer, Visa stock should perform well in 2019.
The bull thesis here is supported by Visa stock’s historically average valuation (the stock is trading in-line with its five-year average valuation), the healthy balance sheet and near 4% free cash flow yield. Overall, Visa stock does look like a relatively recession resistant payments stock for 2019.
Next up is a stock that RBC called a top pick, but which has had a tough time over the past year.
NCR (NYSE:NCR) is a payments company that is heavily levered to cash transactions. Specifically, this company has a huge reliance on ATM transactions. But, the cashless revolution is here, and that means ATM transactions are down big. Last quarter, NCR’s ATM revenues dropped 10%. That led a 20% decline in the company’s overall hardware business, which represents about a third of the company’s total revenues. Meanwhile, growth elsewhere isn’t all that impressive (software revenues +2% and services revenues +4%), so overall growth is very depressed.
This has caused NCR stock to drop 30% in 2018. Unfortunately, it doesn’t look like things will get better for NCR stock any time soon. The cashless revolution is only gaining traction, and as it does, NCR’s numbers will continue to get worse. Plus, the company has a debt-heavy balance sheet that will inevitably be pressured by higher rates. Also, if you look at NCR stock over the past twenty years, this is a stock that lost big during each of the market’s prior three downdrafts (early 2000’s, 2008-09 and 2015-16).
Overall, the bull thesis for NCR stock at current levels doesn’t seem all that great, especially with recession concerns looming.
Unlike NCR, the third payments stock that RBC likes for 2019 is a pure play on the e-commerce revolution.
PayPal (NASDAQ:PYPL) is a global digital payments processor that has 100% exposure to secular tailwinds pushing forward e-commerce adoption. These secular tailwinds are obvious in the company’s numbers. For the past several quarters, this has been a 20%-plus revenue growth company with 25%-plus total payment volume growth, double-digit account growth and high single digit per account spending growth.
Granted, investors are paying up for these secular tailwinds. The current 35 forward multiple on PYPL stock isn’t cheap. But, there’s lots to like about this stock ahead of a potential slowdown because, even if the economy cools, PayPal will still have secular digital adoption tailwinds to keep growth healthy.
As such, PYPL stock looks good here. The valuation is something that warrants caution. But, it isn’t a reason to stay away. So long as the e-commerce revolution remains robust, this stock has ample potential to grow into its valuation.
The fourth payments stock that RBC thinks is set up for a strong 2019 is Worldpay (NYSE:WP).
For all intents and purposes, Worldpay is an under-the-radar and under-appreciated growth company with stable drivers and an attractive valuation. This company is a pure-play on the entire commerce ecosystem, from digital to brick-and-mortar and from consumer to enterprise. Thus, so long as the economy and consumer remain relatively healthy, this is a company with healthy growth drivers.
Moreover, WP stock trades at just 19X forward earnings. Consensus estimates call for 15%-plus earnings-per-share growth over the next several years. A 19 forward multiple for 15% growth is an exceptionally favorable combination that should lead to share price out-performance.
On the negative side, the balance sheet is loaded with debt and cash flows aren’t robust. But, the valuation already accounts for this, and there’s enough revenue and profit growth potential and operational stability here to more than offset balance sheet worries. As such, this is overall a solid pick for 2019.
Total Systems Services (TSS)
Last, but not least, on this list is credit card processor Total Systems Services (NYSE:TSS).
First and foremost, this company is not recession proof. Just take a look at a long-term chart of TSS stock. The stock took big hits in each of the market’s three recent downdrafts (the early 2000’s, 2008-09 and 2015-16). But, this time around, the stock does seem to have some recession resilience that could attract buyers in 2019.
Namely, the cashless revolution is now more mainstream than ever, and TSS is a pure play on this revolution. The more cash goes out the window, the more card payment volume goes up, and the more business TSS delivers. That is why this company is presently characterized by healthy double-digit revenue and EBITDA growth and stable margins. Thus, even if the economy slows in 2019, the cashless revolution should remain prominent, and that should help keep TSS numbers healthy.
Overall, at just 18 forward earnings, TSS stock looks good here. It isn’t recession proof. But, it’s recession resilient, and that should attract buyers in 2019 so long as the underlying economy remains healthy.
As of this writing, Luke Lango was long PYPL.