High-flying tech stocks may be losing their FANGs, and payments giants such as Visa and PayPal are suddenly looking a lot more attractive, according to Reuters, which says tech-heavy U.S. fund managers are having a bit of a change of heart.
Fund managers are now noting that PayPal, Visa and Mastercard, for instance, not only have valuations that make sense, but they also have above-average growth.
In other words, the recent market volatility saw these payments giants hold onto more gains, Reuters said, citing fund managers.
That echoes what Morgan Stanley analysts recently told clients: It may be time to refocus on value stocks, rather than high-flying growth stocks that get a high valuation in terms of the price investors are asked to pay for things like book value or asset value, subtracting net debt.
Value stocks trade at lower prices relative to their fundamentals, and while they may not seem as attractive in a bull market, Morgan Stanley is signaling a coming “regime change” as we reach a “tipping point” in the cycle.
While Morgan Stanley favors energy, utilities and financials, U.S. fund managers Reuters talked to are looking keenly at the payments sector specifically.
And now it’s about who’s lost the least. As Reuters points out, Facebook lost 30 percent over the past three months and Alphabet (the parent of Google) lost 13.5 percent, while Visa lost only 2.9 percent over that same time period.
As The Street notes, “the sell-off that is sending shares earthbound might be only a momentary detractor from secular plays like PayPal (PYPL) and Square (SQ) that are falling victim to short term cycles.”
And Visa has had a stellar fiscal fourth quarter. On Wednesday, Visa said its fiscal fourth quarter profits rose by 33 percent from a year earlier, thanks both to a lower tax rate and more payments processed. Profits were $2.85 billion, up from $2.145 billion from a year earlier—beating analyst expectations. Related: Stock Market Plunge Fails To Impact Gold Prices
The company said it paid $693 million in income taxes during the quarter—down significantly from $959 million for the same quarter 2017, and even though this year has seen pre-tax profits rise 14 percent.
PayPal has seen similar strong results.
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PayPal’s Q3 2018 results released on October 18 showed revenue growth of 14 percent to $3.68 billion. The company processed $143 billion in total payment volume for the quarter, representing 24-percent growth.
This is a great growth story, even if it doesn’t sound as exciting as the FANG set-up that has captivated the bull market for so many years but is now showing risk cracks.
For PayPal, there’s plenty to like even before the revenue figures because it managed to add 9.1 million net new active customers, presenting 11-percent growth year-over-year. PayPal now has a customer base of 254 million, which is up 15 percent over the same quarter last year.
Now, we’re waiting on MasterCard, which is expected to release earnings on October 30.
“Right now we’re certainly looking at a test of the past (market) leadership and some of these FANG stocks have gotten ahead of themselves,” Tom Plumb, portfolio manager of the Plumb Equity fund, told Reuters.
“We’re looking with companies that have high recurring revenue and high growth, and not a lot of companies are in a better spot than the payments space.”
By David Craggen for Safehaven.com
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