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Why Mastercard Stock Dropped 5%

By Rich Smith – Nov 19, 2018 at 3:34PM

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Sometimes, "too expensive" may be a reason not just to not buy but to sell.

What happened

Shares of credit card company Mastercard (MA -0.28%) are joining in (and contributing to) a broad-based stock market sell-off today. With the clock ticking down on the final hour of trading on the New York Stock Exchange, Mastercard stock clocked in with a 5% decline as of 3 p.m. EST -- even worse than the broader 1.5% drop on the Dow.

Perhaps the worst part: There appears to be no Mastercard-specific reason for the shares to be down so much.

Hand holding a blue credit card

Investors aren't giving Mastercard "credit" for strong anticipated Q4 earnings -- until they see them. Image source: Getty Images.

So what

Is this an opportunity to buy or a warning sign that all is not well with Mastercard? Actually, my hunch is that it's neither.

On the one hand, even after falling 5% today, the stock is still selling for a pricey 38 times trailing earnings. Although I'll be the first to admit that Mastercard is a fine company, enjoys a strong moat around its business, and has strong growth prospects -- analysts are forecasting 21.5% annualized earnings growth for the stock over the next five years -- 38 times earnings is still an awful lot of money to put on the card.

I'm hard-pressed to recommend that investors buy into a stock at a valuation this high, even if all is well with Mastercard's business.

Now what

Meanwhile, there's still plenty of risk to the stock. According to Yahoo! Finance estimates, analysts are hoping Mastercard will report a whopping $1.53 per share in profit in its next reported quarter. That's a 34% earnings growth rate they're demanding Mastercard deliver, and as unreasonable as that might seem, there's every reason to believe analysts will punish the stock if they don't get what they're expecting.

With Mastercard up 33% this year even after today's sell-off, perhaps investors are actually making the right call here, cashing in their chips before there's a chance to be disappointed?

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard. The Motley Fool has a disclosure policy.

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