GDP declined significantly this quarter, but the U.S. consumer is picking up the slack. The consumer confidence index is at its highest levels in almost 18 years. Trade uncertainties appear to be suppressing business investment but most analysts agree that the consumer is strong. So how can we invest in a strong consumer? Consumer discretionary stocks are one option, but the sector has high valuations. Traders can find more value in consumer financial and fintech stock.
I’m not talking about banks, consumer financials include payment processors, fintech stock, credit card companies, and other consumer-related finance companies. The sector has outperformed the S&P 500 in the past 12 months, and the valuations currently look VERY attractive.
Consumer Financials (CF) are currently dirt cheap. The sector is trading with a 10.52 P/E ratio, significantly lower than Consumer Discretionary’s (CD) 23.41 P/E. T
In addition, CFs have a better growth outlook. Earnings per share have grown 117.48% in the trailing twelve months. On the other hand, CD grew EPS by only 20.7% during the same period.
From the perspective of both value and growth, the Consumer Financial sector looks like a great opportunity. Buying a fintech stock now could be a great investment down the road. The consumer is expected to stay strong and, with cash rapidly falling out of favor among everyday consumers, CF will likely benefit from increased spending.
Let’s take a look at some of my favorite picks in the industry.
Consumer Finance & Fintech Stock
Square is the hottest up-and-coming fintech stock. Founded and led by CEO Jack Dorsey, the guy who co-founded Twitter (TWTR), Square is one of the most innovative companies in this space. Its merchant services are incredibly versatile and provide small businesses with incredibly detailed sales data. Square also operates Cash App, a payment processing option for consumers that competes directly with Paypal’s Venmo. This company is a favorite among smaller businesses and consumers, so there is little doubt that this company has a bright future. However, like most Silicon Valley innovators, Square isn’t profitable yet and it’s trading at a sky-high valuation.
American Express (AXP)
American Express has been one of the best performers in this sector over the past few weeks. The stock gained over 30% since the beginning of the year. American Express is a favorite among both business clients and consumers for its generous cardholder rewards programs. Its existing commercial relationships can be leveraged into additional revenues. Plus, American Express has an end-to-end payment platform so they can manage all aspects of its payment ecosystem, giving the company more flexibility than most credit cards can muster.
Another household name in consumer finance, Visa has maintained a steady uptrend throughout 2019, and share prices have gained 34.91% YTD. This company has a commanding position in the payment processing market, so it’s in a prime position to capitalize on continued growth in the sector. Digital payment processing is getting easier and more convenient every day, and more people are adopting the technology every day. The trend towards cashless transactions sets the stage for a great growth story in this stock. Visa’s market dominance enables them to easily scale to accommodate the growing market, so the company can sustain both top and bottom-line growth for the foreseeable future.
Discover Financial (DFS)
Discover is another big player in the consumer credit industry. The company is one of the most profitable banks in terms of return on equity. In addition to its credit card business, Discover operates a proprietary payment network. The firm has a solid business mix that includes high-yielding credit card loans, which comprise roughly two-thirds of the company’s total assets. Discover’s biggest problem is competition. Its larger rivals have more cash for national advertising and cardholder incentives. Some analysts believe that Discover will struggle to build its cardholder base without increasing its commitment to rewards. From a value perspective, the company has a strong case. It’s currently trading for only 9.7 price times forward earnings.
Global Payments (GPN)
Out of the companies we’ve discussed, Global Payments Inc. is the best-performing fintech stock of 2019. GPN processes electronic transactions for consumers, merchants, financial institutions, government agencies, and multi-national corporations throughout the U.S., Canada, South American, and Europe. This fintech stock had an amazing 2019, it’s currently up over 62% since the beginning of the year. The growth story is there but, after a run like that, it’s unclear how long the momentum can last. Valuations are currently well above the industry average, but they are still within reason. If you want to bet on fintech, this company probably has the most exposure to the global electronic payment industry.
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