With Thanksgiving on the horizon, many U.S. investors will be turning their attention to the prospects for the holiday season. Even as we have been engulfed by doom and gloom the last few weeks, there have been some signs of life in the retail industry, with several high-profile retailers posting better than expected profits for the third quarter, but the biggest story in the sector is still the seemingly inexorable rise of Amazon (AMZN).
That creates an uncertainty around traditional retail names as the all-important holiday shopping season approaches but there is a way to play the boost that that season brings to retail, regardless of where people choose to shop.
The simple fact is that whether online or in brick and mortar stores, shoppers these days rarely use cash. Cards are the dominant payment system, so if you are expecting a decent fourth quarter for the retail industry, stock in the two major card issuers, Visa (V) and Mastercard (MA) is a logical place to be.
Despite falling with everything else over the last month or so, neither stock is cheap by the most basic metric. Visa has a trailing P/E of around 30, while Mastercard is even worse, with a P/E of close to 38 but that is not the point. What investors should be looking at in both cases is the growth rates, and both have shown year on year quarterly earnings growth of close to 33%.
Under normal circumstances, that would be a big plus for any stock, but these are not normal circumstances. Most of the fears that are driving the market lower right now are focused on future growth, so stocks like V and MA that derive part of their value from growth expectations have been hit harder than the average. As you can see from the chart below, that has resulted in declines of ten and fifteen percent in V and MA respectively since the beginning of October, a period during which the S&P 500 has lost nine percent.
The glass half full way of looking at that is that when we bounce back, which at some point before too long we will, these two stocks will bounce faster and further than most. Of course, if consumers around the world decide to tighten their purse strings this Christmas it will hurt V and MA, but the underperformance so far suggests that that scenario is priced in more than in other areas which may limit the downside somewhat should that be the case.
This trade, however, is based on a belief that that won’t happen. The market is responding to fears about future growth, but consumers respond to how they are doing right now, and all the available data suggests that that is pretty good. Unemployment is at multi-year lows, with wages increasing at an increasing pace here in the U.S., and that is a common pattern around the world. That is why, despite a small dip last quarter, the OECD Consumer Confidence Index (CCI) remains above 100, levels not seen since early in 2007.
I don’t know about you, but when I think about what to buy people for the holidays, I don’t make calculations based on what effect trade policy or interest rate hikes will have on global growth in the future. I look at how much money is in the bank and how secure my wife and I feel in our jobs right now, and for most people in the developed world that is a situation that is better now than it has been for over a decade.
That should make for a decent fourth quarter for retailers, and by extension therefore, for card issuers, so while the fear may last a little longer and we could go lower, buying both V and MA at some point soon in anticipation of a good holiday season makes sense.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.