Time to de-own??

At about the halfway mark we thought this was a sell. That was a terrible call. Now, with hindsight, it simple did not interpret EW properly.

Here we are again, all the way at $264, and we think this stock is at a top. It has done 5 waves from the lows of about $40 back in early 2009. Waves 1 and 5 are about equal which is normal when wave 3 is extended. There  is alternation between 2 and 4. The RSI is way overbought and the MACD has already turned down. Fundamentally if you view Visa, Master Card etc. as just a toll on commerce it is hard to see why such a stock should grow much faster than the economy as a whole. Yet in just two weeks in last October it added more than the stock was worth after the Great Recession.

     The stock yields 0.73% and trades at a p/e of almost 32X, that compares to 13.5X at a financial institution such as Wells Fargo (WFC). Of course if one assumes that interest rates will stay forever at zero, then this stock (and all others) is grotesquely undervalued. We do not subscribe to that and would sell this stock short. The initial target would be just under $200 and a lot more after that. A June 2015, 250 strike put option trades for about $10.

According to Bigcharts this stock is trading at a p/e of 98.35. Yahoo Finance has that ratio at 68.31. Whatever. At least p/e expansion is very unlikely from here on for this stock. The EW count is not at all clear except that the last leg can be counted as a 5 wave sequence and that, if there is a channel of we are about to hit the top. Additionally the RSI and MACD are not confirming the new highs. Simple put this is where one should apply the “buy low, sell high” adage even if you miss the absolute top by 10 dollars or so. The chart on the left is on semi-log scale. If one were to use a normal, arithmetic, scale the stock price is at the upper trend line as well.

It is not clear what exactly has propelled this stock up so much but charging 19% and paying 1% must be a good part of it. Loans losses to date have miraculously been somewhat subdued but that may start to change soon. A dispute over merchant’s fees is about to be settled in court and may cost the company about $4 bln.

Visa is not carrying the credit risk for the accounts, all it does is administer the transactions. I do not like the stock despite that, simple because I think it is in the latter stages of a “wedge”  which has almost retraced 62% of the last down-leg from about $77. It is too late to go long and perhaps too early to short, but that opportunity is just around the corner.