With earnings season winding to a close, I have started to search for the next investment to add to my portfolio. Since I spent most of April looking at bank earnings, I figured financial companies would be as good as any place to start looking. Not all financial companies are created equally, however, so I have decided to break my search into four distinct groups: "too big to fail" banks, banks with over $1 billion in market cap, banks with under $1 billion in market cap, and other financial service companies. From each group, I plan on selecting one company to potentially add to my portfolio, but in the meantime, I will make a CAPScall with hopes that they can help my CAPS score.
What do I mean by financial services?
After looking at banks of various sizes, I wanted to find another part of the financial industry that could hold some good investment options. After looking at various areas within the sector, I settled on companies that benefit from something that happens millions, if not billions, of times per day. With nearly every person walking around with a credit or debit card in their pocket, I figured that something so ubiquitous could make a good investment.
There are four major credit card companies in the United States and I included them all in the chart below. Online retailer eBay
Discover Financial Services
Source: Finviz.com; N/A = not applicable.
On with the eliminations!
The first two companies to be eliminated are also the cheapest on the list. American Express and Discover Financial are slightly different than the other two credit card companies on the list. While Visa and MasterCard act primarily as transaction processors when you swipe the branded cards, both American Express and Discover Financial issue their cards directly to the consumers and take on the risk as credit issuers.
American Express is moving beyond the traditional credit card model. A recently announced partnership with Zynga is taking a swipe at the mobile payment business of PayPal, and they are also getting into Groupon's business by offering deals to customers that sync their AmEx card to a Twitter account. Discover Financial has more to offer than its Discover Card, with some high-yielding CDs in its bank branch, as well as student loans and a potential entry into residential mortgages. These actions bear watching, but I think that the other three companies may have more potential in the near future.
And then there were three...
The next company to be eliminated is the only one on the list that is not a financial service company. Traditionally, PayPal has simply been the conduit to move money from customer to merchant; a test program launched at Home Depot could be what PayPal's business looks like in the future. Nevertheless, with PayPal the main factor behind eBay's recent run of success, eBay may be unwilling to lose this cash cow, and that could ultimately hurt PayPal in the short term, especially with others moving in on its bread and butter of mobile payments.
There can be only one
The two remaining companies are the most expensive on the list, but they aren't so expensive that they should be avoided. They provide many of the processing services that allow consumers to use credit cards in the first place. Visa alone processed over 50 billion transactions in 2011, making up a third of its total revenues. MasterCard was second at over 27 billion transactions, which represented an 18% increase from 2010.
The other companies on this list compete with Visa and MasterCard, but their number one competitor is the use of cash by consumers. As more payments move to the electronic space, cash will continue to dwindle as a method of payment. With both these companies already established as industry leaders, it will be hard for the other up-and-comers to knock them from their perch. If forced to choose between them, I lean toward MasterCard because of a top CEO at the helm and the most room to grow of the two, but either would make a great addition to a portfolio.
Though I am not planning on purchasing shares of MasterCard at this time, I will be keeping an eye on the company and tracking its performance at Motley Fool CAPS. I will be giving the credit card purveyor the coveted "green thumb" rating indicating it will beat the market for the foreseeable future. I encourage you to do the same.
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Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of The Home Depot, Visa, and eBay, as well as creating a write covered strangle position in American Express. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.