After this year's COVID-19 crash and the market's ongoing instability, many people are looking for stalwart stocks to buy ahead of the next downturn. At the same time, savvy investors know that market corrections are excellent opportunities to purchase shares of quality companies at a discount. So what makes a stock ripe for investment after the market tumbles?
There are three things I look for to indicate a company will be resilient when others aren't: high profit margins, plenty of cash on hand, and more than enough cash flow to pay upcoming debt and expenses. With all this in mind, let's learn more about three companies that might be worthy additions to your portfolio during or after the next meltdown.
Payment processing giant Mastercard (NYSE:MA) is a great potential investment as a result of its highly profitable, easily scalable, and time-tested business model. Every time a consumer makes a purchase using one of the company's cards, Mastercard takes a cut, allowing it to collect an impressive sum from the countless transactions that occur each day. Thanks to the growing popularity of cashless payment processing, Mastercard is strongly positioned to make the most out of its massive presence in the space.
Boasting a profit margin of 45.1%, $11.5 billion in cash on the books, and a free cash flow of $8.2 billion over the past four quarters, Mastercard gives investors a lot to like. In the purely hypothetical event that Mastercard's revenue drops to zero overnight, its $7.2 billion in trailing operating expenses could be paid for at least a year, and roughly a third of its long-term debt of $12.5 billion will come due in the next five years, meaning that it won't struggle to stay current even if its revenue takes a hit.
Mastercard's stock is currently beating the market, even though the scale of its initial decline during the crash very closely tracked the S&P 500. Finally, as a bonus, the company's modest dividend payment hasn't declined since it went public, including during the Great Recession,, so investors can be confident in its consistency.
Like Mastercard, Visa (NYSE:V) is a card-based payment processor that has stood the test of time thanks to a toll-collecting business model executed at global scale. With billions of its payment cards in active use around the globe, Visa can process more than 65,000 transactions per second, earning revenue with each card swipe. On an annual basis, Visa processed around 70 billion transactions in 2018 compared to Mastercard's 34 billion, so it has a significantly larger market share. In fact, by purchase volume, Visa is the largest card-based payment processor based in the U.S.
Visa also has strong fundamentals. Its profit margin of 51.4% is even higher than Mastercard's, and its dividend is nearly the same. Despite having more revenue than Mastercard, with $22.9 billion in trailing-12-month inflows, Visa has lower operating expenses. Visa's liabilities also include around $3 billion in current debt as of the second quarter in addition to $703 million in pension and retirement liabilities.
Visa's stock is also slightly ahead of the market for the year.. Critically, Visa shares a near-duopoly in the cashless payment space with Mastercard. This means that as cashless payment becomes the norm, Visa's profitable core business will expand. Finally, both companies will benefit from climbing economic activity in the aftermath of the pandemic-induced reductions.
PayPal Holdings (NASDAQ:PYPL) is a great financial services growth stock. Unlike Visa and Mastercard, PayPal's primary business is online payment processing rather than card-based processing. When businesses or consumers seek to transfer funds or issue invoices online, PayPal is the go-to; as of 2016, 99% of online users in the U.S. were aware of PayPal, and 76% had used it in the past. With each transfer, the company extracts a fee that's a percentage of the sum changing hands. Importantly, PayPal also offers embeddable payment processing tools for merchants' websites, thereby potentially capturing market share from Visa and Mastercard in the process. E-commerce is growing rapidly, so PayPal is well-positioned to prosper.
PayPal is a much younger company than either Visa or Mastercard, and it isn't as profitable, with its margin of 13.4% appearing puny in comparison. It also lost less value in March, and has grown upwards of 93% this year through Tuesday's close, far outpacing the other two. The company's lower profitability is probably a result of its high cost of revenue, which was $10.6 billion over the last 12 months, not to mention its $5.7 billion in operating expenses.
The company is cash rich, with $13 billion in hand that could help it to bounce back after a major mishap. Cash on hand will also open the door to acquiring fintech companies that may improve its ability to serve customers. This is important, as over the last 10 years PayPal has acquired smaller players voraciously, culminating with its $4 billion purchase of the online couponing aid company Honey Science late last year.
Acquisitions aside, in the most recent quarter PayPal only reported $8.8 billion in long-term debt. When paired with its strong cash position and its scalable business model, the company will likely continue to grow for quite some time. In other words, PayPal is positioned to bounce back from the next severe market drop, so it would be great to grab at a discount.