It's every investor's goal to find the top stocks at the right time, but those terms are sometimes subjective. Today, I took a page from Fool co-founder David Gardner to define it as stocks that are beating the S&P 500 over the last three years (including this past year) and trading near their 52-week highs. Additionally, I looked for positive developments with the underlying business that show they could be timely buys even now.
With that background, here's why I believe that Global Payments, Black Knight, and SS&C Technologies are the three top financial technology (fintech) stocks to buy in December.
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Global Payments
Global Payments (GPN 0.47%) is a great name for this company: Its products literally enable payments around the globe. It allows companies to accept credit cards and other forms of payment, manage their businesses with software, and provide transaction data analytics. These services have allowed Global Payments to grow from $2.9 billion in revenue in fiscal 2016 (which ended that May) to $4.5 billion over the past 12 months (a period ending in September).
Revenue growth is primarily organic, but it also comes via acquisitions. In May, Global Payments announced a $21.5 billion merger with Total System Services, creating a monster in the payments space. The merger, completed in September, will increase the company's profitability, with expected savings of $325 million annually in three years. The company is well on pace to hit this goal. The integrations already completed since the merger will save the company $100 million in 2020.
In Global's third-quarter earnings call, management said it will provide detailed guidance for 2020 in February. But it added that the company expects around $7.50 in earnings per share next year, which means it trades around 23 times forward earnings. Even though that's a historically high valuation for Global Payments, given how well its integration with Total System Services is going, I think now is a great time to buy.
Black Knight
Black Knight (BKI) provides financial technology services to the real estate industry. It digitizes the mortgage process, partnering with major banks to offer a simplified home-buying experience. It also provides data analytics and software with the goal of offering solutions for everything related to homeownership. Its real claim to fame, though, is its mortgage servicing platform, where it enjoys just short of two-thirds market share for all primary mortgage loans.
Even though Black Knight's stock is beating the market this year, it has been flat in the second half of 2019, thanks in part to a weak third quarter. Revenue was only up 6% year over year to $299 million, while net earnings fell 13% to $37 million.
Black Knight is facing headwinds, including one concerning former customer PennyMac Financial Services. Last year, PennyMac told Black Knight that it was developing its own mortgage servicing platform. As Black Knight assessed its data, it came to believe that PennyMac used its services to steal trade secrets. So Black Knight discontinued its business relationship with PennyMac in September and sued the company in November.
While this situation has yet to fully play out, it's apparent that for Black Knight to continue beating the market, it needs to be able to protect its intellectual property. To that end, it was awarded two patents related to its Data Hub and "asynchronous sensors" in October. The Data Hub is Black Knight's data-as-a-service offering, which now accounts for 14% of the company's revenue. Asynchronous technology is what allows Black Knight to streamline the paperwork of mortgages. Both products are crucial to its business, and now, thanks to these new patents, they exclusively belong to Black Knight for the next 20 years.
SS&C Technologies
SS&C Technologies (SSNC 0.92%) provides financial services such as accounting and portfolio management to many different financial institutions, including hedge funds and private equity firms. In fact, the company provides services to 75 of the top 100 hedge funds and all of the top 20 asset managers in the country. But it's a banking service that's in the spotlight right now.
Starting Dec. 15, most public companies will be required to comply with new accounting regulations known as current expected credit losses (CECL). Without going into too much detail, this new accounting standard requires lenders to account for future losses rather than just losses incurred. It's tricky because it requires a new method of accounting, and it's a perfect example of why SS&C services are so important. Banks are looking for help complying to the new standards. In its third-quarter earnings call, COO Rahul Kanwar highlighted that a bank worth over $400 billion will use SS&C's services with its entire loan portfolio to be CECL compliant. Its CECL service is something that any financial company could benefit from starting this month.
Beyond this timely example of why this is a top fintech company, SS&C has a great history of paying down debt quickly to increase future cash flows. For example, last year the company acquired DST Systems for $5.4 billion -- a hefty price considering SS&C's market cap was just over $12 billion at the time. But in the 20 months since the acquisition, the company has already paid off $1.6 billion of this debt.
SS&C is guiding for at least $247 million in net income in the coming fourth quarter. That would put 2019 net income over $2 per share, meaning it currently trades around 30 times this year's earnings. That sounds a little steep, but debt repayment affects net income and may not be the best way to assess SS&C's valuation, since it's aggressively paying it down. Don't completely skip the P/E, but simultaneously consider that the company is guiding for up to $1.2 billion in operating cash flow this year, meaning it trades around 12 times operating cash flow.
One final prediction
There are lots of fintech stocks, and whittling the list down to just three is challenging. But while I like all three of these companies today, if I had to pick only one, I'd go with Global Payments. I believe its products stand the strongest chance of increased demand in years to come, and its profitability is the strongest of this group.
