My Real Money colleague Jim Cramer just provided an interesting analysis of a big switcheroo that occurred this past Monday, June 20 -- Costco Wholesale's (COST) changing from credit card issuer American Express to Citigroup-issued Visa cards.
After 17 years, Costco no longer accepts American Express (AXP) cards, and will now only take Visa (V) cards. While Costco will accept any Visa cards, the cards it issues to its members are from Citigroup (C). Who is the big winner here? Cramer makes a strong argument the biggest winner is Costco, followed by Visa.
(Costco, Visa and Citigroup are holdings in TheStreet's Action Alerts PLUS portfolio.)
Costco, he says, could save between $110 million and $220 million in lower interchange fees. In addition, it may gain members because Visa is more widely used than American Express. Plus, members might shop more at Costco because the Visa card is more popular and the Costco's Visa offers a superior deal to members in the form of better rebates than the old Costco American Express.
Of course, Visa is also a winner. American Express's Costco related billings last year totaled about $76 billion, which now go to Visa, along with $12 billion in related loans.
Cramer is on to something. Not only are his arguments in favor of Costco and Visa compelling, but they are backed up by high ratings from my guru strategies. These strategies, which I modeled on how well-known Wall Street gurus invest, also recommend these two companies.
The strategy based on the writings of James P. O'Shaughnessy likes Costco for a number of reasons, including its large market cap ($68.8 billion), a five-year uninterrupted string of earnings per share increases, and a price-to-sales ratio of 0.58, well below the strategy's 1.5 maximum.
Among the companies that pass all of these tests, the strategy picks the top 50 based on relative strength, which is a commonly used measure of how well a stock has performed in the last year vs. the market. With a relative strength of 79, Costco makes it into this top-50 cohort.
Visa is a favorite of my Peter Lynch-inspired strategy. It focuses on the PEG ratio, which looks at the price-to-earnings ratio relative to growth, and is a way to measure how much the investor is paying for growth. A PEG of up to 1.00 is acceptable, and Visa makes the grade at 0.93. With Visa, an investor is buying growth at a favorable price.
Costco and Visa get positive reviews from both Jim Cramer and the guru strategies. That is a combination no investor should ignore.