Sentiment on Wall Street is somewhat sour. This is in spite of three out of four indices making new highs last week. Perception that stocks are suffering is overcoming the reality of the strength in equity. This is perhaps because of weakness in the largest mega-cap stocks in the Nasdaq. It’s the only index that hasn’t made a high in a month. It is important that they do well this week. The strengths in sectors that have led like oil and banking are fading, so the market will need new leaders. Therein lies today’s opportunity hidden inside financial stocks.
I don’t favor the traditional banks because their short-term bullish trade has overstayed its welcome. Financial stocks have gone as far as they can on a stale meme. The bulk of the rally was from the runaway yields.
Machines execute programs to buy bank stocks on bond-price weakness. This meme is at its tail end of the swing. It’s time to flip into fresher opportunities before the herd finds them.
Today’s potential is in bank stocks but in the exciting fintech segment. Last year, the world got a wake up call that it needs to make the digital switch immediately. From here on out, we will aim to make every banking process electronic. These three financial stocks will prosper from that:
Financial Stocks to Buy: Square (SQ)
My first pick is the one that seems to be leading the strategic charge. Square has earned Wall Street’s trust as an innovator and the leader of the pack. The rest seem to be playing catch-up to its moves. SQ is involved with cryptocurrency, for example, so they are on the cutting edge. This opens a slew of other services to grow for the future. The world is their oyster, as they say, and this is only the beginning.
The stock is not cheap but it does not have to be yet. They are blazing trails so they cannot skimp while doing it. As long as they are returning aggressive growth, investors will give them a pass on profitability. In four years, management almost quintupled its top line. They also now have $200 million in net income. It is a respectable legitimate business and critics are losing arguments. The metric that matters most to me is the 11 price-to-sales. That’s in line many mega-cap stocks like Facebook (NASDAQ:FB) and half of that of Tesla (NASDAQ:TSLA). Strategically, they score a 10 in my book.
Technically, SQ stocks has seen better days. It’s down 20% from the highs. Lately buyers had been chasing Visa (NYSE:V), MasterCard and American Express (NYSE:AXP) for some reason. This tide could be switching back in favor to SQ starting last week. Now those bulls need to deal with the resistance going into $240 per share. There will be sellers lurking so the slog starts now. It’s important that SQ rises above $250. This would spur another rally to cover the $266 gap and make new highs.
Paypal (PYPL)
Our second pick today is an either-or situation. PayPal is also blazing trails just like square. Investors can choose between the two and be following the same opportunity. They are both young companies with vision. My 19-year-old son strictly uses services like these two offer. He’s yet to set a foot in a bank in his entire life. I doubt that he will ever have a checkbook. If I asked him to use mine, he wouldn’t know what to do with it.
PayPal, too, has its finger on the cryptocurrency pulse. You can even buy Bitcoin right through a Paypal account. Trends like these are changing the financial world for everyone going forward. The new generation is moving forward with these new services. The rest of us will have to adapt to doing things in more modern ways.
PayPal is also not a cheap stock to own but this is not a disqualification. This management team is also delivering strong growth. Total revenues grew from $13 billion in 2017 to a $22 billion run rate now. Net income now tops a whopping $4 billion per year, double that of 2018.
Clearly there is no bloat in either of these two stocks. They are not cheap but well worth the premium they demand from investors. Visa and American Express revenues are flat to down for the same periods.
Technically, PYPL stock is also 20% off its highs, so it has room to recover. Job one for the bulls is to hold March 5 lows. Otherwise they could trigger a bearish pattern with ominous outcomes. That is not my forecast for it but it’s a scenario, so I would stop out quickly. Otherwise, the next opportunity for the bulls is to beat $255 per share. If so, then they would invite a wave of momentum buyers toward $290, where they last failed.
MasterCard (MA)
I can’t argue for buying the new kids of financial stocks without at least picking one old dog. After last week, Visa or MasterCard stocks would fit the bill. For some reason, I’ve had better luck trading MA stock than Visa. Case in point on Friday they both fell off a cliff. Yet MA recovered to close -2.8% while Visa closed -6.2% on the lows.
Fundamentally they are in similar boats. They have healthy businesses but find themselves outfoxed by SQ and PYPL. They are barely keeping up so investors are not as enthusiastic about their stocks. MA is in a tricky situation. Management has to protect their old cash cows, while chasing the new opportunities. Rushing things can lead to mistakes, so management has its work cut out for them.
The fundamental metrics are not very useful to judge the company value. But the whole world has gone more digital and at an exponential rate since the pandemic started. By default, the business of all of the credit card processing companies has exploded. They will have momentum for decades so value is not a worry. It would take tremendous mistakes to mess up the opportunities they will have.
Therefore, dips in these great businesses are buying opportunities. But like with PYPL, there could be more downside if MA stock loses the recent lows. Gut says the support will hold because it is less precarious than PYPL. Below $335 per share there are hoards of buyers lurking. If I am long the stock, I have confidence I can wait out bumps in the road.
Markets Are on Edge
In all three cases, these stocks need help from the general markets. The media seems intent on creating a problem where there isn’t one. Last week, the Federal Reserve gave investors what they wanted. They promised to hold rates low through 2023. Yet the rhetoric indicates that the experts don’t believe them.
Markets that are this nervous with one foot out the door are dangerous. They could decide to sell-off one day without notice. This is not my forecast but it is important to note it.
While all three opportunities in these financial stocks have good upside potential, they need the markets to stay positive. So far, the bulls are in control of the price action but the bears have shown flashes of brilliance. This week, I am looking for mega-tech companies like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) need to step up and lead.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.