Stock of the week: Visa and how to trade the US consumer
The US consumers has boosted the economic recovery of the US as the global economy recovers from the Covid crisis. Consumers have surplus savings, a plentiful jobs market, rising wage packets and an economic bounce to fuel this consumption frenzy. However, there are some worrying signs on the horizon. Firstly, the rise of the Delta variant could slow the opening up of the US economy and halt consumption in the coming months, secondly, US consumer confidence plunged in early August, with the University of Michigan preliminary index falling by 11 points to 70.2, the lowest level since December 2011. The decline was down to the rise of Covid infections and the rise in consumer prices, which are both causing headaches for consumers. However, the scale of the decline suggests that this consumer sentiment survey is reflecting an emotional response to dashed hopes that the worst of Covid was over, thus we expect the sentiment index to bounce back in the coming weeks, as the latest Covid wave in the US crests.
The US consumer and the latest Covid wave in the US
So, how do we trade in this uncertain environment for the US consumer? We believe that credit card companies are the best place to look, especially as we wait for some key economic data in the coming week. US retail sales are released on Tuesday, and economist estimates are for a 0.1% increase in July, which would be an unsurprisingly sharp decline in US consumer activity for last month. The risk is that spending on restaurants and leisure will have slowed due to the spread of the Delta variant. Added to this, big ticket items and spending on durable goods could also struggle in the coming months because consumers splurged on replacement white goods and other big items after last year’s lockdown and these goods will not need replacing anytime soon. Thus, it could be a lean period for US retailers as we progress through Q3.
Trading spotlight on Visa and American Express
From a trading perspective, one of the cleanest ways to get exposure to the US consumer is to look at credit card companies including Visa and American Express. Interestingly, these companies have both seen their stock prices underperform the broader US stock indices this year. They are up approx. 9% so far this year and have had a torrid few week, for example, American Express has fallen from $177 to $166 between mid-July and the end of last week, American Express was down some 1.45% on Friday. Visa managed to eke out a gain at the end of last week, however, it is down some $20 this month. Consumer credit providers have seen their stock prices fall this summer for two reasons: 1, the market has already priced in the impact of weaker consumer spending later this year due to rising Covid infection rates and rising inflation. 2, consumer credit companies act like tech companies and they were only a handful of Dow Jones companies that declined at the end of last week.
Visa: what to expect from earnings and the technical view
Looking ahead, we think that once the Covid wave in the US peaks, which should be in the next month or so based on the UK’s experience, then the economic conditions are in place for both Visa and American Express to do well as we move into the late summer months. On Thursday, Visa is scheduled to report earnings for fiscal Q3 2021. Consensus estimates are for a reading of $262 per share, which is 5% above the current market price of $249 per share. Thus, if Visa can deliver the goods on Thursday and even beat earnings estimates then we could see a sharp rise in its share price, especially in current market conditions when liquidity remains thin. An earnings beat from Visa could also boost American Express. From a technical perspective, Visa’s stock price is currently just above $232, key support comes in at $228, which is the 38.2% Fibonacci retracement of the end of January low to the end of July high. We would expect this level of support to hold up well, especially as Visa will report results later this week. Thus, this level could attract some buying interest and see a recovery rally back towards $237 initially, as the market starts to price in a brighter future for the US consumer once this latest Covid wave has passed through the US.