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This week’s announcement by Discover Financial (DFS) that its loan activity volume ramped up 9% bodes well for credit card and mobile-processing stocks.
Investors have been responding to these developments by bidding up the prices of the five major processors: American Express (AXP), MasterCard (MA), Visa (V), Capital One (COF) and Discover (DFS). Year-to-date returns on these average 26%.
Here’s why this group is likely to continue beating the market averages in the coming quarters. Plus, I’ll show you some of my favorite ways to invest in those trends.
Concept #1:
Focus on Issuer Portfolio Profits
The card issuers’ futures are tied to profitable transaction volumes.
Discover reported weaker second-quarter profits this week on lower reserve releases and a decline in direct banking. However, total loan growth of 9% to $4.5 billion helped give a boost to its quarterly sales, sending net interest income up to $1.31 billion from $1.29 billion a year ago.
Fortunately, Discover is not the only company experiencing strong transaction growth. The results echo those of Visa (V) earlier last month, which reported an 11% gain thanks to volume with non-U.S. businesses growing at 15% over the prior year.
With this type of continuing growth embedded in the outlooks for 2012, card issuers initially look like the best way to participate in the financial sector — especially given the trading-loss-tarnished image of leading financial names like JPMorgan Chase (JPM). Year-to-date return on that one is a mere 10%, and that’s for a stock that was once considered the undisputed leader in credit quality and capital adequacy.
My personal favorite of these is American Express (AXP). Its higher-spending, higher-income customers produce the lowest charge-off rate among the major credit card issuers. And the company charges vendors nearly double what the other card companies do.
Concept #2:
Trade up to a Mobile Wallet
The last five years have seen a dramatic increase in the use of the mobile devices for financial transactions, revolutionizing the way people receive financial services across the globe.
Mobile Financial Services have become a key long-term strategy for banks, financial institutions, mobile network operators and retailers worldwide. All have identified MFS as an opportunity to achieve considerable growth and as an area in which they must keep up with consumer needs.
And you can expect this to really grow as more phones come enabled with chips that facilitate this even more.
Last month, LG announced that its Optimus Elite handset with Virgin Mobile USA would feature compatibility with Wallet, Google’s (GOOG) mobile payments platform. Wallet ties into the Near Field Communication chips found in a growing number of phones.
To make a small retail purchase like a cup of coffee or bagel, users can wave their Wallet-enabled phone over a check-out scanner, rather than paying with a credit card or cash.
The stocks of the three largest mobile commerce-related companies — eBay (EBAY), Amazon (AMZN) and Apple (AAPL) — averaged 40% year-to-date. In the U.S., I’m definitely a fan of eBay, as it has the best combination of value proposition for users and solid activity measures fueled by innovation and community-building.
With nothing more than a mobile phone, individuals can deposit, store and withdraw cash and safely make the money transfers so critical to day-to-day life.
And the growing GDP per capita will drive this even more.
Concept #3:
Grab the BIG Growth in
Emerging-Market Internet
Leveraging on the rapid penetration of mobile phones in developing markets, Mobile Network Operators and Financial Institutions are delivering new financial products to the previously unbanked masses.
Large populations without bank accounts but with growing GDP per capita should increasingly contribute to long-term transaction growth. The Nilson Report estimates transaction annual growth of about 12% for global payments.
In some specific areas, the growth could be even stronger, with forecasts of 15% for Latin America and 19% for the Asia-Pacific region. And the International Monetary Fund estimates that Russian GDP per capita will compound at 14.5% over the 2010-2016 period, followed by Brazil’s 13.9% growth, China’s 10.8% growth and Indonesia’s 9.8% growth.
Speaking of big growth taking place in developing economies, I’m putting the finishing touches on a brand-new video report that details an exciting new emerging-market opportunity that I predict will be even-bigger than 1990s China. Mark your calendar for noon Eastern on Wednesday to attend this special live event, and keep your eye on this space for your invitation!
Best wishes,
Rudy
