(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of MA and V.)
Visa Inc. (V ) and MasterCard Inc. (MA) shares have been caught in a vicious selloff over the past few trading sessions that has pushed down the payment processors' stocks by nearly 4 and 6 percent respectively. The declines may have gone too far. Both companies hold strong market positions in their industry and expectations for future growth remain strong, one reason these stocks are up by nearly 40 percent this year despite the recent retreat. Now, the drop in these shares has helped reset them on a technical basis.
Whether warranted or not, the two stocks' declines have been in line with the broader technology selloff. The Technology Select Sector SPDR ETF (XLK) has fallen by nearly 3 percent during the same period. Both MasterCard and Visa are regarded by many investors as technology companies at their core.
Both Visa and MasterCard are trading at roughly at 23 times fiscal 2019 earnings estimates. It is tough to make an argument that the recent selloff in these stocks was due to valuation since both stocks are expected to increase earnings at a rate in the mid-to-high teens over the next few years. Analysts' consensus estimates call for fiscal 2018 earnings growth of nearly 17 percent for Visa and MasterCard, according to Ycharts.
Visa Appears Oversold
Visa has now fallen below the lower range of its trading channel. The last time that happened was in July, when the stock dropped to around $93, leading to the massive 22 percent run higher in the stock to roughly $113.50
MasterCard Well Positioned
For its part, MasterCard was moving through the upper range of its trading channel, which shows how the stock initially may have become overbought on a technical basis over the past month. But the stock has now fallen well back to the middle of its trading channel.
While these forces position both MasterCard and Visa to rise, both stocks' link to the tech sector in investors' minds may determine their fate this month and in 2018. If the tech stocks continue their upward trajectory, the two processors are likely to enjoy the ride. If the tech stocks crumble, so too may MasterCard and Visa - and along them investors' paper profits.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.