The Future of Visa and Mastercard

Five and a half years ago, Abnormal Returns asked a bunch of people from the financial blogosphere to share their best pick for the next decade – an asset people would feel comfortable holding. Most chose SPY. There were some calls for Nasdaq, AIG, Apple, Ford, Emerging markets. I chose Visa and/or Mastercard.

Here’s my reasoning in 2012:

I am not a long-term investor per se.10 years is an eternity and a lot of price cycles will change over that period of time. Nevertheless, for the purposes of this exercise, I would go with Visa ($V) or Mastercard ($MA). They have so many catalysts going for them – rising online sales, digital wallets, emerging markets and are part of the S&P 500 which will likely do well too.”

Sometimes, simple and obvious things in the market work out better than you expect.

I am still bullish on Visa and Mastercard. They continue to ride the wave of massive smartphone adoption and rapidly rising online and cashless transactions around the world. But I also pay attention to the potential threats around the corner. The blockchain technology will likely create many new competitors for Visa and Mastercard. They are not going anywhere. They will continue to grow but their margins are likely to come under pressure. I think we are at least five years away from that happening.

What is to stop Apple and Google from creating a bank? Quite a few of their users would proudly transfer their finances to the Bank of Apple and the bank of Google. More and more people will use their phone as a digital wallet and pay everywhere with it. Services like Venmo will become more popular and share less personal information. All merchants will surely love a transaction that doesn’t involve paying 3% to Visa or MA.

What Do The Best-Performing Stocks in 2018 Have In Common?

20 stocks have more than doubled year-to-date.

Many are biotech, but this is a cyclical, not a structural reason. A structural reason is one that persist; one that shows over and over again.

All of them had a market cap of under $1 Billion on January 1st.

All of them have a float of under 100 million shares. Most have a float of under 50 million shares.

Float is the difference between Outstanding Shares and Restricted Shares.

Restricted shares cannot be traded until certain conditions are met. They are usually employees compensation stocks that have not been vested yet. Founders’ stock that is locked up (the founders and private investors in new public companies are usually not allowed to sell their shares in the first 6 to 12 months after the IPO).

A small float can cause a major supply/demand disbalance and a substantial price appreciation or depreciation in a short period of time.

A small float is a double-edged sword. It can lead to fast moves but also liquidity can disappear suddenly and leave you hanging if you own a large number of shares.

Most of the best performers YTD were neglected. They did not have strong momentum going into 2018. Most were/are not profitable. None of them are fastest growing companies.

Most started their move with a huge-volume price expansion. Then, they consolidated and gave a decent secondary entry.

Keep in mind that this analysis is made on a really short time frame. Year-to-date means less than three months as of today. If you study the performing stocks for the past 3 years, you might find out entirely different reasons behind their moves.

Know your time frame and the catalysts that matter the most for it.

The Three Best Performing Stocks for the Past 15 Years Will Surprise You

Netflix recently hit new all-time highs and it ended up on the first page of many newspapers. 10,000 invested in Netflix’s IPO in 2002 is worth about $2.3 Million today. This amounts to about a 40% average annual appreciation.

As impressive as NFLX’s return is, it is not even the best-performing stock for the past fifteen years. Here are the top three. They are all consumer stocks – a Chinese video game maker, a U.S. energy drinks producer, and a U.S. video content creator and distributor.

NTES +11,706%

MNST +77,230%

NFLX +23,467%

I know that I should be telling you who the next Netflix, Monster, and Netease are but even if I knew the future, the odds are that you would not be able to hold through all the pullbacks and volatility associated with huge long-term returns.

Just because NFLX has appreciated at 40% per year for 16 years, it doesn’t mean that it was up 40% every single year. Its price history has been a lot more volatile. It had one 50%, two 80% drawdowns in its history (one of them happened in just five months), and multiple 20% pullbacks.

NTES had three 50% drawdowns.

MNST had two 50% and one 80% drawdowns.

No human can stomach such drawdowns. No machine is programmed to do it either.

What is a lot more achievable from a psychological and emotional perspective, is finding stocks that have the potential to go up 50% or 100% in a year, ride them until their trends are over and then jump on the next ones, compounding your gains along the way.

Holding stocks that double in a year also comes at a price of significant drawdowns – not 50% or 80%, but 15% to 20% pullbacks are normal along the way. Such types of corrections are a lot easier to stomach. There are many more stocks that go up 100% in a year than there are stocks that go up 2000% in a decade.

We can go even one step further in our analysis and find out that there are many more stocks that go up 20% in a month than stocks that double in a year. And holding a stock for a 20% gain in a few weeks doesn’t really require to go through significant drawdowns. Small 10% to 20% short-term gains can compound quickly.

In other words, you can have your cake and eat it at the same time. You can achieve a significant return without having to go through significant drawdowns. As usual, there is no free lunch. As Henry David Thoreau said once “the price of everything is the amount of life (time) you exchange for it.”


The Most Shorted Stocks Currently In the Market Might Be Ready To Break Out

59 stocks priced above $5 currently have over 30% of their float short. Four of them are setting up for a potential breakout.

A breakout in highly shorted names often leads to a squeeze as short sellers are forced to cover their positions. It is not unusual to see a 20-30%, even 50% one-week move in a highly shorted name, especially when its float is relatively small (under 25 million shares).

Here’s a weekly and a daily perspective of the four stocks.

The Best-Performing IPOs of 2017

Financial Times reports that there were 1700 new IPOs around the globe in 2017 – an increase of 44% compared to 2016. China has been the clear leader with more than 400 listings. In the U.S. companies raised $49 billion or 2X the amount raised in 2016.

Here are some of the notable movers among new listings in 2017:

The crypto-mania has entered the stock market. The stock of any company with a blockchain press release has been hot in the past couple months. LFIN and VERI are two examples.

Coal is back. Believe it or not, coal stocks are gaining attention again. Is it because of Trump’s administration’s relaxed attitude towards coal or is it because the new crypto-mania has boosted energy demand, no one really knows.

The biotech sector was one of the best performers in 2017. Naturally, select biotech IPOS shined. ANAB and ARGX proved once again why price momentum is one of the most powerful equity selection tools.

Quite a few new Chinese companies started trading in the U.S. in 2017. The Chinese education company, BEDU went from $10 to $30 before it had a sizable pullback.

ROKU staged a massive short squeeze. It went from $20 to $60 in two months.

The Canadian maker of goose-feather jackets, GOOS almost doubled in 2017.

Redfin went public and now Zillow is not the only publicly-traded play in real-estate listings.

Let’s not forget to mention the disappointments in 2017: SNAP, APRN, YOGA, HAIR failed to live up to market’s high expectations: