As a middle-school basketball coach, I enjoy practices, but I admit that sometimes they can be a bit of a grind over the course of a long season.
We do relays in which players have to dribble-weave their way through a course of cones … or we see how many layups each kid can make in a 90-second span … or we play 3-on-3 games in which the defense (not the offense) earns points by stopping the opponent from scoring.
I like to think accentuating fun and competition enhances the athletes’ overall experience, while also preparing us for the intensity of games.
What does any of that have to do with investing? I’m glad I asked!
I enjoy researching stocks that I might want to include in DTA’s Income Builder Portfolio, but I admit that sometimes it can be a bit of a grind.
That’s especially true these days, when everybody is obsessed with the COVID-19 pandemic’s impact on the stock market (as well as on our lives).
A couple of weeks ago, the market was in a freefall and everything seemed to be “on sale.” Since then, every hint of even slightly good coronavirus-related news has pushed prices higher, often inexplicably.
So in an effort to escape the 24/7 cacophony of COVID-19 news, and to disrupt our routine a little, I said to myself:
Let’s Have A Contest!
After the market opens today, I will equally divide the $1,000 biweekly IBP allocation from Daily Trade Alert to buy shares of Visa (V) and Mastercard (MA), the duopoly that dominates the global credit-card industry.
The plan is to hold these two technology companies in the IBP for years.
Whenever I decide to add to one, I will use a similar amount of cash to increase our stake in the other. Along the way, we will reinvest dividends in both.
Over time, we will see whether V or MA will have superior long-term total return.
As the above image shows, Mastercard has outperformed Visa over the last decade … and both have absolutely annihilated the S&P 500 Index.
Quality, Quality, Quality
Yes, I know I said our little contest was supposed to give us a respite from coronavirus news, but let’s be honest: It does affect our investments, and V and MA certainly are not immune.
Leaders at both companies have warned that the significant reduction in consumer transactions due to the pandemic will adversely affect revenue and earnings for several quarters.
Nevertheless, Morningstar Investment Research Center’s most recent analyses of MA and V were topped with these headlines:
Coronavirus Doesn’t Change the Attractive Long-Term Picture for Mastercard
Coronavirus Darkens Visa’s Near Term, but Long-Term Picture Remains Bright
Morningstar went on to say:
Growth in cross-border transactions, which are particularly lucrative for the networks, will likely be under pressure this year over fallout from the coronavirus outbreak and a reduction in global travel. From a longer-term point of view, we think it is likely that smaller and more regional networks are building out additional capacity for cross-border transactions, which could eat into growth a bit in the coming years, but we haven’t seen a material effect yet. However, while this situation bears watching, Visa and Mastercard’s global networks remain unparalleled, and we think this will remain the case for many years to come.
Both V and MA have stellar financial fundamentals, as illustrated by the following graphics (all data from Simply Safe Dividends).
Furthermore, average annual sales growth for each company was about 13% for the decade ending Dec. 31, 2019.
That impressive showing makes sense: More and more transactions have been done via electronic payments, fewer and fewer with cash.
I mean, I don’t even carry the green stuff any more … so if you ever hope to hit me up for a few bucks, you’d better be carrying a card-reader.
That trend only figures to continue — and Mastercard and Visa, accepted virtually everywhere, are the unquestioned leaders in the industry.
At this point you might be asking: Jeesh, Mike, if Mastercard and Visa are so wonderful, why did you make them wait nearly 2 1/2 years to join the IBP?
Reasonable question, and I hope these are reasonable answers …
First, as stated in the IBP Business Plan, our primary goal is to build an income stream. Both V and MA have sub-1% dividend yields.
Second, Mastercard and Visa are always overvalued, and often extremely so. Each currently has a 30+ P/E ratio.
Nevertheless, I believe it’s more than acceptable to overlook both “issues” (if they even are issues) in bringing companies with such sterling “quality metrics” into the portfolio.
As I said in my previous article, we are well ahead of our income targets; so taking small positions in a couple of low-yielders shouldn’t derail our plan at all.
And as long as we don’t make a habit of buying pricey stocks, adding some growth should only improve the IBP in the long run.
I will go into valuations and dividends at length in my post-buy article, to be published Wednesday, April 22.
Wrapping Things Up
As an investor, it seems more difficult than ever — bordering on impossible — to predict what is going to happen with stocks in the short term.
Looking long-term, however, I sure like the idea of adding businesses as strong as Visa and Mastercard, which will become the IBP’s 32nd and 33rd positions. (View all holdings HERE.)
And hey, I also like having a little fun by making this a “contest” we can track for years.
Given the incredible track records and future prospects of MA and V, I have a strong feeling the big winner will be … the Income Builder Portfolio.
As always, I urge investors to conduct thorough due diligence before buying any stocks.
— Mike NadelWall Street legend warns "A strange day is coming" [sponsor]
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