Just Put it on the Card

 | Sep 09, 2011 | 3:30 PM EDT  | Comments
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Even in a stubbornly weak economy that has consumers weighing purchases carefully, transaction processors are seeing record highs in earnings and stock prices.

MasterCard (MA) rallied to an all-time high Thursday, continuing a longer-term price uptrend that's held up throughout the year. The stock is up more than 50% year-to-date. It recently hit price resistance above $340, and it reversed lower after clearing that price Thursday. But the stock has gradually been trending higher along its 10-week moving average, a sign of continued institutional support as many stocks have fallen beneath key price lines.

Even though consumers around the world are less willing to open their wallets than in the past, they tend to reach for plastic more often than paper when they do. That change in behavior is having a positive effect on the entire transaction-processing industry. MasterCard's revenue has been growing at an ever-faster clip in recent quarters, and the earnings growth rate has been 24% or higher in the past three quarters.  Wall Street sees MasterCard's profit up 26% and 18% in the next two years.

Larger rival Visa (V) is also seen posting solid earnings growth in the same time frame. It, too, has notched good earnings and sales increases lately. The stock is rallying up from a consolidation that began in mid-July, and is trading above its 50-day moving average.

Discover Financial Services (DFS), something of an also-ran in the branded transaction-processing business, is going along for the ride with its larger peers. The stock has faltered since retreating from a four-year high of $27.92. It's been struggling to regain its 10-week average following a rebound from an Aug. 8 low of $20.51. Discover's revenue performance has not matched those of MasterCard and Visa, which, of course, also boast better market share. Profit growth, though, has turned sharply higher in recent quarters. Looking ahead, Wall Street expects the Illinois-based company to earn $3.59 per share this year, up a whopping 194% from 2010. Profitability is expected to decline at a rate of 18% in 2012, to $2.96 per share.

MasterCard is currently the leading name within that business segment, and it is the stock I'll watch most closely. It can be tempting to try to get in early on a lesser performer that hasn't yet notched big price gains, but that strategy can backfire. Stocks assume leadership because institutional buyers have confidence in the company's underlying business and future growth prospects. Rather than try to ride the coattails of the best performers within an industry, it's better to wait for a technical buy point on the true leaders.

Lesser-known companies from other segments of the payment business are also benefiting from changing trends.

Cardtronics (CATM), which operates more than 30,000 ATMs in the U.S., U.K, Mexico and Puerto Rico, recently rallied from a consolidation and has gotten support at its 10-week line. Like MasterCard, the stock hit an all-time high recently, but retreated with the general market. Last month the company said it would expand its U.S. presence via an agreement with grovery chain Kroger (KR), which will put Cardtronics' ATMs in 350 additional locations in California, Nevada, Florida and Alabama. Houston-based Cardtronics already has equipment operating in more than 1,100 Kroger stores in 32 states.

Cardtronics went public in 2007, a factor that could work in its favor. Stocks that began trading within the past decade or so are often among the ranks of the market's best gainers during uptrends. With solid fundamental growth projections for the coming years, as well as a track record of profit increases, the small-cap could be well positioned for price advances in the next bull run.

At the moment, with so much uncertainty and volatility plaguing the market, maintaining a strong watch list is a solid plan. It can be a great sign when a non-defensive stock undergoes healthy buying in a market downturn, and is often a precursor to further gains. But even strong stocks can slip in an overall market plunge, so it's worth being patient during this time of market whipsaws.

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