There's probably 100 or 200 great businesses in the stock market (don't have a clue about the exact number but there's surely not 1000 great businesses). However, there's probably not more than 20 or 30 incredible businesses. To me, Visa and Mastercard are part of that very select club.
They have a moat which appears to be one of the widest on earth. And what's their closest competitor? American Express. And Amex is not even close.
For those who don't know the concept, Visa and Mastercard take no risks at all. They don't lend money like American Express. They offer the payment network to link you to merchants. And the big banks associate with Visa and Mastercard to lend money to consumers. So, when you load your credit card, you pay back what you owe to some bank. Visa and Mastercard only offer the technical facilities to pay with a credit card and they get paid when you use their cards at any shop.
There's less and less money around us. ATM machines are not a tendency for the future (remember that good old Directcash Payment recommended by some well known name, anyone?). Visa and Mastercard are used in most countries of the world, excluding China (where nothing from our demonic western civilization is welcomed).
Both companies have great financials. Low debt, high ROE, high growth. They both buy back shares. They're both essential to the majority of the population. Have you seen their net profit margins? 44% for Mastercard and 50% for Visa in 2018. Find me something that beats that. Find me some fucking weed stock that beats that. Find me some fucking Tesla that beats that.
Some people will say that they'll wait for a better entry point for these stocks. You may wait, but don't wait too much and don't set a fucking specific price you want like these assholes on Seeking Alpha who keep writing shit like "I'll buy when the stock is in low 80's" (talking about a stock that's never been cheaper than 100$ for the last 5 years).
It's simple, it's just a matter of historical valuation. If the stock has an historical forward PE of 20 and the growth of the past looks comparable to the growth of the future (which is the case for Visa and Mastercard in my opinion) and the stock is selling at a forward PE of 30, don't fucking buy it. However, if it's selling for 18 times next year's earning, then fucking buy it. Don't hope to buy it for 15 times next year's earning because you'll only pay that price when all the rest of the market will be avalaible for 8 times next year's earnings.
The only risk I see for these businesses is if management goes crazy. It may happen, but it's one of the few businesses where the brand is so solid, so established, so part of everyday life, that management will have to act really like mofos to destroy the company. And another company will have a lot of work to do to start from scratch and rise to the same level. Just like Google, in a way.
I don't understand why people take risks with other stocks than Visa and Mastercard. Why paying an expensive price for a growth much less predictable than these two? Why paying for Tesla, hoping for profit in the long term while there's been profit for ages with Visa and Mastercard? Of course, don't put 50% of your portfolio in these two, because they're a bit expensive, but I'm pretty sure that, in every portfolio of canadian individual investors, I'd find at least 2 or 3 stocks that should be replaced by Visa and Mastercard. Why pay 8 times earnings for some crappy stock when you can buy an incredible stock for 20 times next year's earnings? I know it sounds a little weird but paying a slightly expensive price is usually the right thing to do.
V and MA are amongst the crown jewels of US companies.
RépondreSupprimerWhen I first bought V and MA a few years ago, I didn't realize how rare it is to have such a high profit margin and growth profile. You only need to go through 10-15 random annual reports of NYSE stocks to realize that V and MA are exceptions in an ocean of mediocrity. Most profitable companies have a 5-10% net margin.
Generally speaking, the market is not dumb (it has occasional bouts of depression though). So it very rarely offers such businesses at a discount. V and MA will probably never be available at a 10 P/E in the next 5 years, unless there is some massive disruption in this sector or the government imposes fines or something. I remember the day V was at 125 in December and I bought some more but I doubt if it will be available at 80 anytime soon (I do have a limit order @80 just in case though).
I don't agree that the only risk is management going crazy. There is government regulation risk, and massive disruption risk. In China WeChat and UnionPay dominate the market (V and MA aren't making money there). If WhatsApp or Apple comes out with a compelling solution, it may take away V and MA's cake. They would need to collaborate with the banks (or maybe become the banks?). In capitalism, whenever you're making outsized returns on equity, you have a large target on your back.
What companies would you include in your incredible business list?
RépondreSupprimerProbably the best business model ever. Period.
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