Pair Trade Visa and Capital One

Consumer confidence keeps heading lower as gasoline keeps heading higher and property values plummet. This double whammy has the potential to put the consumer into a long tail-spin. In such an environment, as disposable income declines, credit card use goes up.

Visa (V) would benefit from such credit card use, as it already has. The stock has recently pulled off its high of $90 and sits a good 12% lower. Meanwhile, credit card issuers will not fare so well. Companies like Capital One, which issue unsecured debt, will see increasing amount of delinquencies and loan defaults. Capital One (COF) is sitting a mere 10% above its 52-week low and has collapsed from $53 to $39 within 5 weeks.

Despite being in the consumer credit business, these two companies have very different business models. Visa does not issue any debt. They process transactions and make money with each transaction. Capital One issues credit to the consumer and makes money off the interest collected. With homes being foreclosed, and cars being repossessed, credit card debt and loans are a natural contender for defaults too.

In such an environment, I recommend a pair trade. Go long Visa and short Capital One.

Full Disclosure: I am long Visa but my position can change anytime without notice.

Comments

[YosVendijanto]

Good Advice , I believe P/E will declines in Q2.

[Walt17]

As credit card limits are cut and cards canceled, the number of times they are used will go down. This should reduce Visa's income.

[Saurischian]

...the number of times they are used will go down. This should reduce Visa's income.
//////////////////////...
In the last quarter reported, Visa cards were used 11 Billion times.
Based on a 90 day quarter, which is was, the breakdown is over 83,000 time a minute.

Ok, so three people don't use their Visa card as much.
THAT will have a major impact on Visa's earnings. NOT!

Saurischian

[poet1]

people still get miles for airfare etc., with their cards- so they will use them & pay the cash later. you get nothing from using cash first.

[visaman]

Again, people are missing the point. The number of transactions that Visa does in the US may go down, but the overall number of transactions worldwide are going UP exponentially!!

[Bright]

I tend to agree with visaman. We are GLOBAL.

[Plantinseeds]

This article is way old news. I don't think anyone is uneducated on V or MA at this point. They do "not" issue credit....they make their $$$ from credit card transactions only.

Even though I am long on V, anyone who makes purchases on credit cards of any kind is a fool if they don't pay the entire balance each month.
IMHO that is a large part of what is wrong in this world today (financially).
Greed and credit= disaster!
If you can't afford it? Don't buy it.

[stevenhmiller]

Definitely old news...I don't understand why these guys reguritate the same thing over and over again. Can't be creative and write something original?

[Voogle]

'In such an environment, as disposable income declines, credit card use goes up.'

In fact it is in all environment - good and bad, the credit card usage is hugely raising globally. Why pay cash if I can get 5% or 10% discount, reward points and 30 to 60 repayment period if I pay by Visa Card.

[greencapitalist]

friends, take a look at mastercard. it has been thrashed almost close to 25% and it trades like 13 to 15 times in valuation discount to visa.

even rimm has not been this bad as mastercard. infact mastercard beat 59 cents huge and double guided.

if i tell somebody to look at mastercard stock, they see as though i am recommending a company that has missed last earnings by a dollar or so :-)!!!!

catch on my blog at http:matrader.blogspot...

[GeorgeBowser Jr]

Good Analysis. I wonder do you all consider the same for Discover and American Express. Like Capital One, they are lenders of unsecured debt, and are probably lowering their credit limits for cardholders as well. Does anyone think bankruptcy looms, as I hear GE is having a difficult time in selling their credit card portfolio.

[Plantinseeds]

I do not follow D or AE. If they are transaction companies then they are ok. If they issue credit....well I would be taking yoga lessons so as to not rip any muscle tissue from having to bend over to kiss my own.....goodbye :)

[AmesTiedeman]

They both go lower.

[User 172125]

I will have news for all of you on V soon ......I'll be posting an article.

Done with comments- too many children.

[ronjsq]

Buy Visa Now, its a great bottom price
This stock will cross $100 soon

[mrbill for V]

VWINNER this about the 10th time you have said you are done with Seeking Alpha (too many children) why do you bother with us anyways
you are suppose to be some big time precious metals expert.

[User 172125]

Mr Bill- You are a child, which is obvious by your obsessive nature.

I spoke to the President of Seeking Alpha and he urged me to take a more active role in the site. We will soon be advertising and providing content. Check back and grow up.

As far as being a 'precious metals' expert- I'm involved in all metals from rare earth, to base, to precious- among many other types of investments.

As far as this site and this blog it is, overall, a great place for a lot of topics. I stand by my earlier statements that Yahoo and Google 'Children' (whether 20 or 60) do spoil what could be an intelligent discourse on the merits of a given company.

We created a number of blogs- and our V blog covers the 'plastic revolution':

www.visawinners.com