July22,2019 BARRON’S M5
Tuesday, lowered its sales projections for
the remainder of 2019, citing wan freight
volume.
Look for that second-quarter consumer
strength to boost earnings at the likes of
Visa (V), Chipotle Mexican Grill (CMG),
AmericanAirlinesGroup (AAL), and Ama-
zon, when they report this coming week.
“The present economic backdrop is one
of the most puzzling I have experienced in
my career,” CSX CEO James Foote said on
Tuesday evening’s earnings call.
The contrast between the economy’s con-
sumer and industrial segments is stark.
RBC’s Porcelli predicts 4% growth for over-
all consumer spending in the second quarter.
That information will be released on Friday,
just ahead of the Fed’s July 30-31 rate-set-
ting meeting.
As Porcelli put it in a note to clients, the
central bank is about to cut rates “even in
the face of very sound economic fundamen-
tals” in what he called “the most significant
part of the U.S. economy—households.”
Behind the Fintech Boom
Facebook ’s Libra digital-currency project
met with a chilly reception in Congress this
past week. But don’t take Libra’s troubles
as a broader sign of problems in the world
of financial technology.
Fintech companies, the digital conduits
that sit between banks, businesses, and con-
sumers, continue to outpace traditional
banking names, which have underperformed
the broad market over the past year.
The KBW Bank index has fallen 4.5% in
the past 12 months, compared with an 8.4%
gain for the S&P 500. Fintech is outpacing
them both: The KBW Nasdaq Financial
Technology index is up 16.3% over the past
year.
Fintech companies have had strong
growth for years, especially relative to
other segments of the financial industry.
They’re the beneficiaries of a long secular
shift to card and online payments from cash
and checks.
“That is a very nice tailwind,” John Jor-
dan, a financial industry analyst at Janus
Henderson, tells Barron’s. The sector was
the focus of a recent Barron’s cover story
on the significant opportunities ahead for
Visa, Mastercard (MA), and PayPal Hold-
ings (PYPL). All three are in the KBW
Fintech index.
A series of mergers—largely a result of
optimism about the outlook for payments
companies—is helping drive fintech’s outper-
formance.
Total System and Global Payments
(GPN) announced a merger in May that val-
ued Total System’s stock at a 20% premium
to its price before news of negotiations was
reported. Earlier, FidelityNationalInfor-
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mation Services (FIS) had agreed to pay
$34 billion for Worldpay (WP) in March,
and Fiserv (FISV) said it would buy First
Data (FDC) for $22 billion in January. (The
latter two deals are expected to close in the
second half of the year.)
Another factor boosting fintechs’ perfor-
mance, relative to that of other financials,
Jordan notes, is the expectation that the
Fed will cut interest rates later this month.
That will make lending less profitable, while
potentially boosting economic growth and
consumer spending.
As a result of that potential scenario, in-
vestors have never prized owning the com-
plex, highly regulated pipes of the global fi-
nancial system quite as much as they do now.
The stocks in the KBW Fintech index fetch,
on average, 27.5 times estimated earnings for
the next 12 months. That’s a 62% premium to
the S&P 1500. Fintech’s five-year premium is
just 36%, according to Keefe, Bruyette &
Woods analyst Melissa Roberts.
Fintech’s premium over banking stocks
is far greater. The index trades at a 129%
premium to stocks in the S&P 1500 finan-
cials sector. Over the past five years, that
premium has averaged 80%.
Given the valuation gap, investors might
be tempted to buy traditional financial
stocks that have exposure to payments and
other fintech trends. Citigroup, Capital
One Financial (COF), and JPMorgan
Chase all have significant credit-card busi-
nesses that will continue to benefit from the
same secular trends lifting stand-alone fin-
tech stocks.
Be wary. The fintech units within large
banks still play second fiddle to rate-sensi-
tive lending. The best way to play the fin-
tech boom is through the MVP stocks—
Mastercard, Visa, and PayPal—that
Barron’s highlighted in our May cover story.
“The three companies look virtually unas-
sailable,” we wrote then. That hasn’t
changed. —BENWALSH
Industry Action
Performance of DJ U.S. Ind, ranked by wkly % chg.*
Basic Materials 0.45%
–0.15 Consumer Goods
–0.55 Utilities
–0.64 Health Care
–0.96 Technology
–1.09 Industrials
–1.45 Financials
–1.83 Telecommunications
–2.18 Consumer Services
–2.99 Oil & Gas
*ForbreakdownseepageM26. Source:S&PDowJonesIndices
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