Buy the consumer creditors
From Mastercard to Visa to American Express and Capital One, the credit card companies are going to stage a huge rally. The Fed announced today two new programs that would total $800 Billion of new liquidity to consumer creditors and to Fannie and Freddie. $200 Billion of the new money will be dedicated to consumer credit such as auto loans, student loans, credit cards, and some small business loans.
American Express has been having a hard time producing returns because it can’t borrow enough money to lend. Capital One was having similar problems and Visa and Mastercard are seeing their US earnings stall as lenders aren’t giving out fat credit limits. This $200 Billion influx of cash should do a lot to start stimulating the consumer economy and boost credit limits and the amount of money people are able to borrow.
I would be buying any of the four names mentioned in the article right now. Visa and Mastercard are much safer considering neither of them lend. Capital One and American Express are both speculative plays but their stock prices are surely undervalued at this point. All four companies are going to have much better earnings statements starting next quarter. I’d buy now before the rest of the market.
Two different kinds of credit card companies
First there are the servicing companies then there are the issuers. Mastercard and Visa do no lend any money, instead they charge commercial establishments a percentage of each sale with one of their cards. Mastercard and Visa make money if borrowers spend, not if they pay the money back. This limits profits but also downside risk. If you’re looking to limit your risk exposure on this trade go with the servicing companies.
Capital One is a credit card issuer and lends its own money to consumers. American Express both has its own credit card servicing service and also lends money to consumers. These are most risky investments as their income is partially, or entirely dependent on the ability of consumers to pay them pack plus interest.
