After a day of complete debacle on Wall Street where the S&P 500 fell over 3% and Apple (NASDAQ:AAPL) fell over 5%, it’s hard to conceive that anyone would want to look at any stocks from the long side. But this is what we’re doing today because there are quality stocks that got caught up in the headline trading. Specifically, fintech stocks like Visa (NYSE:V) MasterCard (NYSE:MA) and Square (NYSE:SQ) were unfairly punished.
The banking sector as represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) fell -3% on Monday. In comparison, V stock fell 5%, MA stock fell about the same, and SQ stock almost 7%.
These are proven winners that have business models that will survive the current headlines from the U.S. versus China economic war. So the selling was overdone.
The business of fintech stocks relies heavily on transactions being electronic. To that, this is an ongoing migration from paper to electronic. It is global and happening at an exponential rate. There are no signs of it reversing, so the transaction demand from these three companies will only increase for years to come.
Barriers-to-entry are high so there are only a handful of competitors so MA, V and SQ stocks are the ones to bet on.
In general, when the stock market falls the best practice is to sit back and do homework. The goal is to find stocks that have retraced the last rally and are now falling into support.
Visa, MasterCard and Square stocks all fulfill this requirement and then some. Valuations in these growth stocks almost don’t matter, but even here, there’s some good news for the bulls.
It is impossible to pin an actual bottom, especially because we continue to be in headlines trading mode. Investors are selling stocks indiscriminately and in panic after tweets from the White House or a press releases from the Chinese state media. So this is when homework falls hostage to headlines. But long term, the fundamentals will prevail.
While all three fintech stocks look good for a bounce trade, this doesn’t eliminate the fact that they could still see lower lows in the next few days. The general stock market is still having a crisis of sentiment which usually punishes the good and the bad stocks alike.
Including the Monday drop, V stock fell a total of 10% from the recent highs. This constitute a full correction by Wall Street standards. Nevertheless this doesn’t mean that it’s a bottom. Year-to-date, Visa stock is still up 35% so there is plenty of fresh winnings to give back if the bears press the issue.
However, I do like the technicals here which suggest that V has fallen into short-term support levels. These are more so zones than hard lines in the sand. Visa broke out to new highs from $165 in June and this dip merely revisits the neckline. Often, the bulls need to test the footing from which they broke out before they set higher highs.
Albeit, this retest materialized too fast and too deep for this to be a clear bottom but it’s worth a shot. Nevertheless, I think that in the long run, buying V stock at these levels should reward investors.
MA stock is in a similar boat as Visa. They trade in lockstep. And after setting highs recently, MasterCard stock also fell almost 5% on Monday. Valuations for both of these stocks are similar as they both trade near a 40 trailing price-to-earnings ratio.
This is not cheap in absolute terms since it’s about double that of Apple and Alphabet (NASDAQ:GOOGL). But this has always been the case. These are growth stocks that are proven winners and I doubt that a few bad headline trading days will change that fact.
MA stock also has fallen into its support band centered around $245 per share. This too is more of a zone than a hard line in the sand. And since they don’t ring bells at bottoms it is impossible to take full positions in either of these two and be confident of short-term wins. But for the long term, I bet that owning MA at these levels will be profitable — especially for patient investors.
SQ stock is lagging our other two fintech stocks year-to-date. This last earnings report caused a bit of enthusiasm going into it. But sadly for the bulls the trade was to sell-the-news after buying the rumor.
The SQ $83 per share remains a tough failure level to watch for the next big trigger long. But now it has fallen into support. Square stock has almost priced out the entire June rally so the bears have had their way with it. This brings price back into a pivot level. Those tend to be supportive because the bull and bears would want to fight it out hard again. This creates congestion and an opportunity for the SQ stock bulls to buy it and restart a rally.
Fundamentally, SQ stock is the most expensive of the three fintech stocks from a P/E perspective since it still loses money. But it sells at nine times sales and that’s half V or MA. Regardless, SQ is still the new kid on the block so it’s supposed to spend more to grow into its valuation.
Of the three fintech stocks, I consider going long V or MA a conviction buy trade versus SQ more of a speculative one.