The consumer finance industry has registered a 22.30% year-to-date (YTD) gain on the back of record low unemployment, steady wage growth, and high readings of consumer confidence. However, a wave of selling swept across credit services stocks Monday as recession fears regained traction, stoked by increasing global trade disputes and a fall in the benchmark 10-year Treasury note that has led to a partial inversion of the yield curve. Reports of possible government antitrust investigations on tech giants also weighed on stocks in the space.
As antitrust probes heat up on FAANG members, investors may start to consider what impact they will have on existing and future strategic partnerships with leading credit services players. In particular, tightening privacy regulations could thwart credit card companies sharing transaction trends with large tech companies.
From a valuation perspective, large-cap payment processing companies trade at high earnings multiples, suggesting that prices may already reflect the latest round of solid quarterly earnings. Technical analysis supports the "fully valued" scenario, with recent topping patterns warning of some near-term selling before these stocks process further gains. Swing traders who anticipate a continuation of Monday's downward momentum in credit services stocks should check out these three shorting opportunities.
Visa Inc. (V)
Visa Inc. (V), with a market capitalization of $346.60 billion, operates as a payments technology company that facilitates commerce through the transfer of funds among consumers, merchants, financial institutions, and strategic partners. In 2018, the payments giant processed $8.2 trillion in purchase transactions. Visa posted fiscal second quarter earnings per share of $1.31, topping analysts' expectation of $1.24. Revenue came in at $5.5 billion, roughly in line with forecasts. The company trades at 32.8 times earnings, well above the industry average multiple of 21.9. Although Visa stock has returned 22.65% on the year, it has underperformed the credit services average return by nearly 3% over the same period as of June 4, 2019. Investors receive a 0.61% dividend yield.
Despite Visa shares rallying over 30% from their Christmas Eve low to sit firmly in bull market territory, the price has formed a double top pattern over the past month that indicates an imminent pullback. A bearish divergence between price and the relative strength index (RSI) also exists, showing waning buyer enthusiasm. In Monday trade, the stock broke below a significant trendline extending back to late December that could induce additional selling in subsequent trading sessions. Those who short Visa at the current level should look to cover their position at major support near the late September or early October swing high around $150. Consider placing a stop-loss order slightly above Monday's high at $162.83.
Mastercard Incorporated (MA)
Mastercard Incorporated (MA) provides transaction processing and other payment-related products and services in more than 200 countries. It processed over $4.3 trillion in purchase transactions during 2018. Although the 53-year-old credit card behemoth beat the Street's top- and bottom-line growth expectations, it trades at a steep premium to its competitors, with a price-to-earnings ratio (P/E ratio) of 40.4 – almost twice the industry average. As of June 4, 2019, Mastercard shares have a market value of $247.45 billion and a sport a healthy 33.66% YTD gain.
After a steep four-month rally to start 2019, Mastercard shares have formed a double top pattern throughout May, hinting that a short-term top may be in place. Like Visa, the pattern's second peak made a higher high, while the RSI indicator's second peak made a lower high to add bearish divergence to the mix. Monday's breakdown below a five-month trendline provides an entry point for swing traders. Conservative traders may wait for the price to close below the double top's neckline before executing a short sale. Look for a decline to $225, where a horizontal line connecting previous price action may act as support. Close trades if the stock moves above yesterday's high at $252.98.
PayPal Holdings, Inc. (PYPL)
With a market cap of $123.98 billion, PayPal Holdings, Inc. (PYPL) offers a technology platform that enables digital and mobile payments on behalf of consumers and merchants. Its flagship payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle. The California-based company reported impressive first quarter results, recording earnings growth of 37% on a year-over-year (YoY) basis, while revenue increased by 12% from the year-ago quarter. With the stock currently trading at almost 60 times earnings, the share price may have mostly factored in the upbeat financial results. PayPal stock is up 25.48% YTD as of June 4, 2019.
Although PayPal shares sit only 8.7% below their 52-week high of $114.66, a double top pattern that has formed over the past six weeks threatens to end the uptrend that has been in place through most of 2019. Monday's 3.85% decline closed below both an established trendline and the pattern's neckline, which makes this short setup the most appealing of the three discussed. Traders should set a take-profit order at the $92.50 level, where the price encounters a confluence of support from several swing highs and the 200-day simple moving average (SMA). Position a stop above Monday's high at $111.09 to manage downside risk.