Despite the escalating U.S.-China trade war threatening to derail global economic growth and partial inversions of the yield curve indicating a looming recession, credit services stocks have continued to outperform the S&P 500 Index amid rising credit card usage and the growth on online shopping. Financial research firm RBR expects global card expenditure to grow at 10% per year between 2017 and 2023, increasing from $25.1 trillion to $ 45.2 trillion over the period.
Moreover, companies in the space have the potential to expand in areas, such as facilitating payments between accounts by individuals, increasing cross border transactions and providing payroll solutions for small businesses. Investment bank Morgan Stanley believes credit services companies exposure to the banking system and compounding growth effects place them in a favorable position.
“We expect that the payments sector will be an on-going net beneficiary because of the long-term secular shift to electronification and compounding efficiencies,” says MS equities analyst James Faucette, per CNBC.
A recent pullback to crucial support levels in three leading credit services stocks provides a buy the dip swing trading opportunity. Let’s discuss each issue in further detail and point out some tactical strategies to join the long-term bullish momentum.
Capital One Financial Corporation (COF)
Capital One Financial Corporation (COF) provides various financial products and services in the United States, the United Kingdom and Canada. The McLean, Virginia-based company operates through three divisions: Credit Card, Consumer Banking and Commercial Banking. Capital One posted second quarter (Q2) adjusted earnings of $3.37 per share, surpassing analysts’ expectations of $2.84 per share to deliver an 18.66% earnings surprise. The figure represents bottom-line growth of 4.7% compared to the year-ago quarter. Although the company’s revenue for the period shrank 1% year-over-year (YoY), it topped forecasts by 1.76%. Management cited a rise in net interest income, improving loan balances and strength in its card business for the upbeat results. Capital One stock has a market capitalization of $39.64 billion, offers a dividend yield of nearly 2% and trades up 13.08% on the year as of Aug. 27, 2019.
The company's share price trended steadily higher between late December and July. More recently, the shares have retraced within a falling wedge pattern toward the support of a significant horizontal line and the 200-day simple moving average (SMA). Traders could use a cross of the moving average convergence divergence (MACD) line above its signal line as a buy signal. Those who take a position should consider booking profits on a test of the year-to-date (YTD) high at $98.19. Manage risk by placing a stop-loss order beneath this month’s low at $82.68.
Discover Financial Services (DFS)
Discover Financial Services (DFS) offers direct banking and payment services in the United States. As well as issuing debit and credit cards, the company provides deposit accounts and a variety of loan types. Its Discover network processes transactions for Discover-branded credit and debit cards and provides payment transaction processing and settlement services. The $24.84 billion company should continue to be well supported by share repurchase programs. According to Credit Suisse Group AG (CS), Discover Financial has bought back about 8% of its market cap over the past twelve months, with the Swiss bank expecting the company to repurchase an additional 8% of its shares in 2020. As of Aug. 27, 2019, Discover Financial stock yields 2.29% and has a YTD gain of 34.35%, outperforming the S&P 500 index by almost 20% over the same period.
The payment processor’s shares continued higher for several months after the 50-day SMA crossed above the 200-day SMA in early April to generate a “golden cross” buy signal. However, since late July, the stock’s price has staged a sharp pullback to now trade in a support zone between $75 and $77.50. Those who enter at current levels should anticipate a move back toward the last month’s swing high at $92.47. Control downside by setting a stop order somewhere below $75 and amending it to breakeven point if price climbs above an area of overhead resistance at $82.
Navient Corporation (NAVI)
Navient Corporation (NAVI) provides education loan management and business processing solutions for education, healthcare and government clients in the United States. Its three primary operating segments include Federal Education Loans, Consumer Lending and Business Processing. The company’s consumer lending division performed strongly in Q2, reporting earnings of $85 million, up 28.8% on a YoY basis. Lower provisions and expenses coupled with a higher net interest margin – up 1 basis point- helped drive the segment’s performance. Analysts place a 12-month price target on the stock at $17.14, representing 35% upside from Monday’s $12.70 close. Navient shares have a market value of $2.93 billion and sport an impressive YTD gain of 47.79% as of Aug. 27, 2019. Investors also receive an enticing 5.14% dividend yield.
Navient surged to a new 52-week high on July 24 after delivering its impressive quarterly earnings. Like Capital One Financial shares, the stock has consolidated within a falling wedge over the past five weeks and appears to have found support from a horizontal trendline at $12.50. The countertrend move provides a suitable entry point for traders who may have missed the late July breakout. Once in a long position, think about setting a take-profit order in the vicinity of the 52-week high at $15.67 and limiting downside risk with a stop placed slightly below the 200-day SMA.