With 83% of Americans aged between 30 and 49 owning a credit card and the economy in better shape this year than many economists had expected, it's not surprising to see the consumer finance industry registering a year-to-date (YTD) gain of 28.20% and leading the financial sector higher over the first four months of 2019. According to nilsonreport.com, purchase volume for general purpose credit cards is expected to increase 87% from $5.5 billion in 2017 to $10.4 billion in 2027, which places the industry in a sweet spot for long-term growth.
From a technical standpoint, several large-cap players broke out of consolidation areas on Friday, April 26, after exceeding analysts' earnings expectations. Consumer confidence and employment data scheduled for release this week, along with an update from the Federal Reserve at its monthly press conference, will largely determine if the earnings rally in credit services stocks can follow through.
Traders looking to capitalize on recent momentum in credit services stocks should add these three names to their watchlist.
Capital One Financial Corporation (COF)
Capital One Financial Corporation (COF) provides a broad range of financial products and services through three business segments: Credit Card, Consumer Banking and Commercial Banking. It operates branches in New York, New Jersey, Texas, Louisiana and Virginia. The McLean, Virginia-based bank holding company reported first quarter adjusted earnings of $2.90 per share, exceeding analysts' expectations of $2.68, to deliver an earnings surprise of 8.21%. Net revenue over the period also topped estimates, coming in at $7.08 billion versus expectations for $7.01 billion. Results benefited from improved deposit balances and strength in the company's card business. Capital One stock has a market capitalization of $43.99 billion, offers a 1.96% dividend yield and is up 24.53% YTD as of April 29, 2019.
The Capital One share price convincingly broke above a loosely constructed inverse head and shoulders pattern after the company reported earnings. Above-average volume accompanied the 6.45% Friday rally, which indicates buyer conviction. Traders who play the breakout should consider setting a take-profit order near the 2018 January swing high at the $104 level. Manage risk by positioning a stop under Friday's low at $90.70 and moving the order to the breakeven point if price moves above the 52-week high at $100.30 set on Aug. 27, 2018.
Discover Financial Services (DFS)
With a market value of $26.49 billion, Discover Financial Services (DFS) offers direct banking and payment services. It issues branded credit and debit cards and processes payments on the Discover network – the third largest payment network as ranked by overall merchant acceptance. The Midwest-headquartered financial services company posted first quarter earnings per share (EPS) of $2.15, marking a bottom-line increase of 18.1% compared to the same quarter last year. Revenue jumped 7.3% year over year (YoY) driven by stronger net interest income, loan fee income and transaction processing revenues. As of April 29, 2019, Discover Financial stock yields 2.25% and has a YTD return of 38.34%, outperforming the credit services industry average by 11.65% over the same period.
Discover Financial shares powered to a new all-time high of $81.54 on heavy volume after the company's better-than-expected quarterly results. Earlier this month, the 50-day simple moving average (SMA) crossed above the 200-day SMA in what technical analysts refer to as a "golden cross." The signal typically heralds the emergence of a new uptrend. Let profits run by using a 15-day SMA as a trailing stop. Protect trading capital by placing an initial stop-loss order beneath Friday's gap low at $78.36.
Synchrony Financial (SYF)
Synchrony Financial (SYF) provides consumer financial services. The company, which has a $23.70 billion market cap, offers a variety of credit products through three sales platforms: retail card (credit cards), payment solutions (personal loans) and CareCredit (health care financing). Goldman Sachs upgraded Synchrony Financial from "neutral" to "buy" in mid-February, saying that the company has renewed contracts with four of its five largest partners through 2024, which eliminates an "overhang" on the stock. Goldman also likes Synchrony's capital return program, believing that it may generate $5 billion in stock buybacks over the next six quarters. The consumer financial specialist topped earnings estimates for the fourth consecutive quarter when it reported on April 18. Synchrony Financial stock has surged 47.53% YTD and pays a 2.58% dividend yield as of April 29, 2019.
The company's shares have continued their steady climb after the Jan. 23 earnings gap. Positive results from industry competitors last week helped push the stock up above the top trendline of an ascending triangle that suggests upside continuation. Only average volume accompanied Friday's 2.69% advance. Therefore, traders may want to wait for a retracement to the breakout level before opening a long position. Look to book profits on a test of the January 2018 swing high at the $39 level and cut losses if the price fails to hold the April low at $32.07.