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Why Discover Financial Services Surged 20.5% in April

By Billy Duberstein – May 3, 2020 at 2:00PM

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Hope for some sort of economic recovery boosted this credit card issuer.

What happened

Shares of Discover Financial Services (DFS -0.74%) rose 20.5% in the month of April, according to data from S&P Global Market Intelligence. Discover is one of only a few card networks that collects discount revenue from merchants, but its primary business is in making loans -- mainly credit card loans to its customers.

As such, shares cratered in March, as the COVID-19 outbreak spread across the world and forced an economic shutdown in the U.S. With many businesses closing and unemployment skyrocketing, Discover and other lenders plunged. However, after new stimulus measures and some potential green shoots on coronavirus treatments, shares partially bounced back in April.

A young woman smiles and gives a thumbs-up and holds a credit card in her other hand.

Image source: Getty Images.

Now what

In late March, the federal government passed the $2.3 billion CARES Act, which is providing businesses with many potential benefits (such as worker-retention grants), giving individuals below a certain income threshold a onetime payment of up to $1,200, and boosting unemployment benefits.

The passage of the government stimulus, along with unprecedented actions from the Federal Reserve, seems to have put a floor under the economy for the time being. As such, financial stocks bottomed in March and continued their slow bounce into April as more stimulus efforts came to light.

In addition, positive initial clinical results from Gilead Sciences' remdesivir trial in Chicago boosted hopes that the most serious cases of COVID-19 could be treated, and therefore might enable more economic activity. Any event that can potentially open up more of the economy is good for financial stocks, Discover included.

Finally, Discover delivered its first-quarter earnings report, during which it outlined the various ways in which the company is much better positioned for a recession than it was in 2007, before the great financial crisis. This includes a strong balance sheet, better FICO scores across its loan base, more advanced underwriting, and a lower "open-to-buy" level, which means there is a lower amount left that consumers can draw on their existing revolvers. That may have injected more confidence into Discover shares as well.

Now what

There's still a high degree of uncertainty around financial stocks, Discover included. However, the company had fallen to incredibly cheap levels in March, and still trades at just a 6 P/E ratio, even when factoring in a loss in Q1 due to increased loan reserves.

Discover eventually emerged from the 2008 financial crisis as a stronger company, which means today's discounted stock price could prove a bargain looking a few years out. However, whether the April bounce proves sustainable in the near term or whether the stock might fall back to the March lows in the meantime is anyone's guess, as the stock's movements will largely be determined by virus-related events in the coming weeks. 

Billy Duberstein owns shares of Discover Financial Services. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

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