Mastercard Inc. (MA)

(A Top Pick Oct 6/15. Up 5.49%.) He is a big fan of this. They are a little more indexed to Europe. Broad-based stimulus is going to drive consumer spending. With the “tap and go” they are really leveraging that small ticket purchase. Every time you tap, they make a little bit of money. Phenomenal business going forward. There is still room to go.

He likes the valuation gap here. A little more low hanging fruit on the cost side. It is a well run company. It is all flowing through an existing network. The best advent is the ‘tap’ to make payment. They are going to capture a huge share with this. He thinks it is a long time before a watch can replace a credit card. You are converting purchasers to tap right now.

Visa (V-N) or MasterCard (MA-N)? He would say Visa is the bigger and the better of the 2. One of the benefits of this is that it has a bit more of a technological change going for it. Both are priced to perfection, and he questions if that growth is going to be able to get there. There are a lot of potential disruption coming with PayPal and Apple Pay. If there were to be a pullback, both companies would pull back quite substantially because their multiples are so high.

Visa (V-N) and MasterCard (MA-N)? The great thing about these is that they are not taking credit risks. They are a processing system and get their fee each time people use their card. Which one you buy would depend on which one you think looks cheaper.

(A Top Pick April 9/14. Up 27.14%.) There is a long-term secular shift from cash into electronic payments. There are lots of growth avenues, such as international expansion, mobile payment expansion, Apple Pay and prepaid cards. Valuations are decent for this premier name.

It has 27 time earnings and should become mature at some point and then the multiple drops to 20 or 18. He is worried this one won’t retain its multiple much longer. The stock has done nothing wrong. If it fails to make a new high and then starts to break trend line and make lower lows, then you can predict the multiple is going to contract. A lower multiple means at least lower appreciation in stock price.

(A Top Pick April 9/14. Up 21.88%.) Long-term, the secular trend is from cash and cheques to electronic payments. Reasonably valued at 24X forward earnings with a growth rate of 15%-20%. PEG ratio is 1.4 to 1.5.

Visa (V-N) or MasterCard (MA-N)? A great sector, but both companies are fairly expensive and priced to perfection, this one a little bit more so. It really depends on the changing way that people pay for things. A complete shift away from a cash society. Regardless of how people pay, security will be a pretty determining feature. He would focus on Visa because it has a larger established base, but being priced to perfection is a problem.

When there was turmoil in the credit card environment he switched to V-N. They have greater exposure to the debit card business. MA-N is 3 or 4 multiple points more expensive than V-N. It is more international and that is tougher in terms of economic activity.

MasterCard or American Express for a long-term hold? This one is more like a tollbooth. When people use their card, they get a payment. They don’t have any liabilities for payment. If he was pushed, he would say that this is probably the better of the two.

He owns Visa. MA-N does not have as big a debit card business as V-N. Visa has a greater growth prospect because of their exposure to debit cards. He would switch out of MA-N.

He is not sure there is any problem. Perhaps profit taking. Thinks they are on the ball with mobile payment systems. This stock will continue to do well. 15% growth rate. It is not expensive. A world class name.

Investors have discounted the risk that other forms of payment, particularly mobile payment, could potentially pose for credit card stocks over the long-term. This typically trades at over 20X earnings, which is a bit rich. As an alternative, consider American Express (AXP-N), which is going down market a little, and picking up business from both MasterCard and Visa (V-N). You get a bit of a recurring revenue stream in that AMEX has a traditional bank attached to it as well.

Switched to Visa (V-N) about 4 years ago when there was a proposed charge on debit card fees to merchants. Because Visa’s business was much more highly skewed to debit cards, it got hurt badly and lost its premium to MasterCard for a period of time, which he thought was a wonderful time to switch over. He would definitely use this weakness as an entry point.

It’s a great story. It is a toll bridge that doesn’t take on any credit risk. There is lots of growth. The risk is the fact that people are moving to other payment technologies, especially in other parts of the world. Paypal is one of them. It is not as global as VISA so there is room to grow the franchise there.