APRIL 11, 2020
Summer’s
right around the corner. Warm weather always brings out a filthy wave of muggers, a group blithely unconcerned by social distancing. But why worry? That’s yet another benefit of plastic. It armors your ass.
Over the past six fugly months the financials have backed up the most, a nasty 16.32%. Of the 23 big ones we track only four are up. How about the cards? American Express down 16%, Capital One -28.7%, Discover cut in half, -46%.
Meanwhile the leaders MasterCard and Visa have given up only 2.36%, and 0.1%. And? Over the past 5 days the financials have been ripping it up; Capital One +44.4%, Discover +43.4%. Three of the top five best performers among the financials are cards. But that’s only one reason we’re thinking financial heavy weights. Another is that it’s financial infrastructure. Get some “Ass Armor. Mastercard.”

The
S&P 500 speared down 34% in just 23 gut-clenching trading sessions. Next it bounced 23% back in only 12. Come on. WTF? What do we know? We know that unpredictable macro events fall freely from the sky without notice to ruin our fun. Then investors scatter as if children. Markets then often careen curb-to-curb. Done that. Investors freak, and re-freak, and over-freak. Optimism replaces brute fear, and then fresh fear returns when the damage is displayed in numbers, like sixty million jobless claims for a start. And next week it’s earnings–kicking off with who? The financials; Wells, Bank of America, & Citi. That’s what we know.
The pandemic in China created business losses for Chinese companies and those who rely on them, including U.S. based firms. Supply chains have been disrupted, which means more lost business. Social distancing in the U.S. has compounded that problem, mandating wide-spread business closures. And the point? Earnings season will etch into stark clarity the exact extent of those lost earnings, and Q2’s as well. The building unemployment figures and crushed jobs numbers will further clarify the economic damage of this virus. And the point there? Do both of those seem baked fully into stock prices now? How can investors truly bake-in unknown unemployment and earnings numbers? Fact. The simultaneous closure of all face-to-face business in the U.S. has no precedent.
Market historians will tell you that downturns display one basic pattern, in two parts. The market falls when a problem emerges. Actions are taken which lead to a rally. Then the actual economic damage is clearly revealed, resulting in part two, another market fall. Example. In 2008 the investment firm Lehman Brothers melted away, confidence was rattled, and the market fell hard.

The
federal TARP program was announced, and investors realized that the government and Federal Reserve had mobilized. The market rallied. Part one done. Following this, waves of distressed mortgages began actually failing, banks strained against mounting fears of horrendous loan losses and balked at government calls to restructure or refinance said mortgages, and the market fell again. Pattern complete.
Every investor faces the learning curve. The above macro scenario is driving this bus. Investing means involvement with the entire complexity of both our markets, and our economy. That in turn means involvement in world markets, and the global economic system. That makes true simplicity is rare. And the point? Investing is a discovery process for each of us. That system is financial, and the financial sector is too big and important to ignore, and financial infrastructure makes it all happen. But we need to cover our ass. Think Mastercard.
Mastercard Inc. MA: NYSE

Mastercard
is a $267B. player in an oligopoly. Visa’s their main rival, at $373 billion. It’s sort of like Boeing and Airbus. The other players are relatively small. American Express(AXP) is $76B., Capital One’s(COF) at $27.5B., and Discover’s(DFS) $12 billion. Paypal’s(PYPL) at $124B. and Square’s(SQ) at $25.8 billion. The majority of all global transactions were handled in cash, until two years ago. The battle’s on for a yet building wave of electronic payments. CFRA research feels we’re at an “inflection point” in that mega-trend and that the size of that wave has been underestimated. Who’s best positioned to win? Mastercard and Visa.
Many smart people will tell you that the card business is risky, compared to say mortgage lending. They said that more loudly before the jaw-dropping mortgage meltdown that left America littered with “For Sale” yard signs. The actual reality is that the risks related to card-based loan losses is built right into the high rates. What’s your card charge? Along with the profit-motive, that’s another reason the rates are so stunningly steep.
During the bank-engineered mortgage meltdown beginning in 2008 entire swaths of supposedly “rock solid” mortgage loans failed at 5x the rate of credit card-based credit accounts. As droves of demoralized homeowners literally walked away from mortgage lenders, most of whom refused or only pretended to help, they yet continued to pay their cards. Why? Immediate liquidity is vastly more important in immediate terms.

Ours
is a consumer-driven economy, driven by consumer payments. When money grows tight, cards continue to offer consumers both convenience and a source of financial flexibility, albeit with harsh fees and rates. MasterCard lies at the heart of that, as maybe the best part of that.
Is Mastercard a good stock? Yes. But be patient. Prices seem very likely to be challenged again, repeatedly. If buying, do so in scales. Card issuers face the reality of lower payment volumes as a direct result of business closures. Mastercard and visa also face the potential of regulatory intervention, as the pair dominate the industry. Fin-tech also posses a the potential of disruptive innovation. Yet who doesn’t face technical transformation?
Yet Mastercard is as good as it gets. Nothing works all the time. MA’s future is in part visible in its performance now. For every dollar MA invests it returns 60%. That’s stunning, and it’s called Return on Invested Capital(ROIC). Square’s ROIC is 14.7%. Paypal’s is 11.8%, and Visa’s 21.4%.
Margins speak with a distinctive voice. What are MA’s saying now? “Monster.” MA’s net margin is 47.9% vs. the benchmark 10. Return on assets 30% vs. 4.1%. What can we say? Well, that the most important margin is of course Return on Equity(ROE). MA 143.4% vs. the S&P 500 benchmark of 15.1%. How many 15s do you have to stack to equal that? Almost ten. And yes, you do have to pay up for that. MA is flat expensive, except against earnings growth. But then, it’s a growth stock, a secular growth stock that can grow in any market. You pay up for those, even now. Why? Quality.
Mastercard Inc. MA: NYSE

Mastercard
is a secular growth stock selling at a 2.1 price-to-earnings growth rate(PEG). If one had owned MA over the past year they would be 14.8% better off. Call into mind that over the long haul a 7% annual equity return is considered good. MA’s given you double that, including this goddamn virus. Anyone lucky enough to have owned MA steadily over the past three years would now be 144.2% better off, and over five 212.5% better off.
212% equal’s 42.4% a year–for five straight years. Anyone unhappy with that should be quietly but promptly ushered directly off the train at the earliest stop. Of course, past results are no guarantee of future performance. But then, you gonna bet against Patrick and the Chiefs, now? Most who do are carved up like a pie. And he’ll do it with a smile. Mastercard. Think about it. We’ve got a slice. As always, good luck and good investing.
