Paper or Plastic?

“Go for a business that any idiot can run –

because sooner or later any idiot probably is going to be running it.”

― Peter Lynch

The Portfolio

Our blog portfolio continues to perform well and volatility remains low. Year-To-Date the portfolio is up +13.73% (as I write, markets are still open). Today I added to some of our existing positions where prices were below our cost basis.

New Subscribers

Several new subscribers joined the blog today. Thank you all for joining and participating. I always enjoy hearing from subscribers and like getting readers suggestions for new posts.

Today's Buys

CVS 24 shares @ $54.41; total holding = 100 (cost basis reduced from $56.65 to $56.05)

BSTC 25 shares @ $57.37; total holding = 50 (cost basis reduced from $58.81 to $57.37)

NBRV 500 shares @ $2.00; total holding = 1500 shares (cost basis reduced from $2.65 to $2.43)

FCCO 17 shares @ $17.85; total holding = 50 shares (cost basis reduced from $18.68 to $18.39)

FOXF 50 shares @ $73.00; (NEW HOLDING)

Today I bought 50 shares of Fox Factory Holdings at $73/share. Years ago I had the opportunity to work with founder Bob Fox. I believe this well managed company will outperform over the summer months and into the Fall/Winter as their products serve industries that should see improved sales. I'm not incorporating a China trade war fear as costs for this company are contained in the supply chain and added costs are not relevant to customers. Fox Factory Holding Corp. designs, engineers, manufactures, and markets ride dynamics products worldwide. The company offers front fork and rear suspension products for mountain bikes, road bikes, and e-bikes; and powered vehicle products for side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, motorcycles, and commercial trucks. It also provides mountain and road bike wheels, and other performance cycling components, including cranks, chain rings, pedals, bars, stems, and seat posts, as well as sells aftermarket products to retailers and distributors.

12-month price target $94.

MasterCard

We live in a paper vs. plastic world and in this world I choose MasterCard. (apologies to my dear friends at Visa). In all fairness, the portfolio holds both Visa and MasterCard and the return so far has been significantly greater for Visa (32.85%) vs MasterCard (3.83%). The purchase of Visa at $128.13 I felt was a mis-pricing by the market, so we got a nice bump when investors changed course. My mistake was not buying a lot more Visa at those low levels. So why MasterCard?

Even digital payment processing companies like PayPal and Square encourage users to choose plastic. Seriously, one might think that the whole point of using PayPal or Square is to get rid of the cash and the plastic and keep transactions digital; but both companies actively encourage and provide benefits for using plastic. By the way; they both use MasterCard!

Square: See Offer Here

PayPal: See Offer Here

On a valuation basis one would conclude that Visa and MasterCard are essentially the same. Just looking at the respective stock prices and 1-year consensus target prices we'd find that both companies are expected to grow about 6-7% from current prices. I don't buy it, right now Visa is looking more like fair value and MasterCard is looking mis-priced, even though MasterCard sports a higher P/E ratio.

P/E Ratios

The Price/Earnings Ratio (P/E) that most investors look at is the Trailing Twelve Months (TTM) P/E, a backward looking metric. As long term investors the past isn't particularly useful, except that when combined with the Forward P/E we can get a sense of which company is excepted to grow earnings the most. When the Forward P/E is lower than the TTM P/E investors can expect that earnings will increase, and nothing moves a stock price higher and better than earnings increases. See Rule #6 below.

MasterCard: TTM P/E = 43.68, Forward P/E = 29.08, Delta = 14.6

Visa: TTM P/E = 35.12, Forward P/E = 27.37, Delta = 7.75

On an earnings basis alone, we can expect MasterCard earnings to outperform Visa significantly.

Most investors will look at quarterly results and determine that a company is doing well or not. That approach is like looking at a map in your lap while driving a car. But we're in this for the long haul and want to look out the windshield and really see where we're going. Looking at MasterCard vs Visa on Net Income and Earnings per share over 12-months and a 3-year CAGR, MasterCard lives in a different universe where it has outperformed Visa consistently on these metrics.

Return On Equity

Looking back to stats since 2017, Visa has under performed the industry average for Return on Equity while MasterCard has been delivering numbers more than double the average.

Debt & Quick Ratios

When you or I buy a car, do we buy what we need and can afford, or do we buy something we can't really afford that doesn't provide any additional benefit over lower cost alternatives? (okay, that's a bad example). What I look for in the debt metric is how companies use debt. Are they investing in their business at appropriate levels, or are they using debt in non-constructive ways. I'm not smart enough to ferret out exactly what's going on inside a company but one metric helps me make a good guess, especially when I compare it to peers. The Quick Ratio is a fast way to see if a company can pay its short term obligations. A Quick Ratio of 1.0 or lower is a poor number, anything above 1.0 shows strength, or an ability to easily pay short term debts. While MasterCard has a lower number, suggesting it might struggle a bit, I think this shows that MasterCard has been investing (at low rates) in the future of its business and the increases in Net Income and Earnings suggests this is correct.

MasterCard Quick Ratio = 1.16

Visa Quick Ratio = 1.50

Price/Projected Earnings

This metric is the big give away that MasterCard is undervalued by investors and its peers are trading at fair value. Let me put it another way, MasterCard is CHEAP and everyone else is priced to perfection. Today MasterCard's Price/Projected Earnings is almost half of its peers. How can that be if earnings are projected to be significantly higher than Visa. There's a mis-calculation here that I'm willing to bet on.

Sales Growth & Earnings Growth

MasterCard is quite simply stealing market share from competitors based on these two metrics. Sales growth is inching up above its peers, while earnings growth is nearly double and growing.

The Future

Okay, all that info is the here and now with a bit of the past. The big question is what will drive the business forward in the future? I think the answer is Apple. MasterCard has been selected as the payment processor for the new AppleCard. The general consensus on the street is that the new AppleCard is something entirely new from Apple. Ask anyone you know what they know about the AppleCard and you'll likely here the Apple mantra; "A new kind of credit card, created by Apple, not a bank" (See it here)

Dig a little deeper and we can see that Apple isn't building a payment processing system and that its very much like every other credit card;

"And MasterCard is our global payment network, so you can use it all over the world."

And then there's this;

"Every credit card needs an issuing bank.

To create Apple Card, we needed a partner that was up for the challenge of doing something bold and innovative. Enter Goldman Sachs. This is the first consumer credit card they’ve issued, so they were open to doing things in a whole new way."

The AppleCard does in fact provide useful benefits, low rates and appears to be easier to use. What I think is most important is how prevalent this new credit card will likely become with millennial's and their parents who are still buying Apple products for their kids. The AppleCard has removed a great deal of friction which means that buying Apple products will be effortless. We can only guess how long it will be before Apple offers incentives for buying Apple products and services using AppleCard.

We're a paper vs plastic world.

I'm raising my 12-month price target on MasterCard to $330 from $300.

"Markets don't go to zero, Portfolio's do.

Buy quality, be patient...and use sun screen"

- Clay Baker

Stay Invested,

Clay

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Keep Me Honest

  1. S&P 500 declines to 2,350 or more (1-3-2019)

  2. Healthcare and Biotech sectors outperform (1-3-2019)

  3. S&P reaches 3,000 by year end (1-11-2019)

  4. CSCO reaches $60/share (1-18-2019)

  5. VEEV reaches $145/share (2-14-2019) (achieved $145.23 on 5-10-2019)

  6. CVS reaches $91.50 (2-27-2019)

  7. Bull market takes another leg up (4-7-2019)

  8. The Fed will lower rates 1-2 times (5-13-2019)

Clay's Rules

Rule #1: Don't lose money

Rule #2: See Rule #1

Rule #3: Portfolios go to zero, markets don't

Rule #4: When a good stock you own drops 10% below your cost basis, add shares

Rule #5: Bull markets aren't sustained without the Transports

Rule #6: When Forward P/E is lower than TTM P/E, expect earnings to increase

Disclosure: I am personally invested long in some or all of these stocks or funds that appear in the Stay Invested portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the Stay Invested portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. I am invested long in these securities mentioned in this post:

CVS, CSCO, VEEV, STZ, AMZN, NVDA, BCRX, GS, BDSI, VEEV, VTI, GLD, HD, AWR, XLNX, MRVL

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.
This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

© 2016 by Clay Baker all rights reserved