Wednesday, April 14, 2010

Bookkeeping: Restarting Discover Financial Services (DFS)

Discover Financial Services (DFS) is one of those rare charts nowadays... it has been a relative laggard and is actually near key support levels so it provides a much more low risk entry point for us.  After consolidating for a month, today the stock broke out over resistance of $15.75 which has turned it back 3 times in the past 4 weeks.  Volume is nothing to write home about, but (broken record) volume has become meaningless in the market that can melt up forever on no volume.

We have had this stock in and out of the portfolio the past few years ... our last exit was mid December 2009 when the stock broke support in the low $15s.  So 4 months later we are able to purchase it back at a slightly higher price but seemingly at a point it could be ready to run.

The stock is very expensive on 2010 earnings estimates of 36 cents but names like this are being priced on a more normalized environment in 2011, in this case $1.43.  (about 11x 2011 estimates)  This is line with Capital One Financial (COF) at 12x 2011.  American Express (AXP) is a bit more pricey at 14x 2011, but has a different clientele.

As I thought about the missed opportunities in retail stocks the past 4-5 months due to the mass waves of strategic defaults hitting America, it hit me that credit card companies will be another beneficiary of this phenomenon.   That extra $1200, $1500, $1800 a month that people no longer are using on the mortgage can be used to catch up and/or keep current on their credit card debt.  (another subsidy to the banks via Fed)  And with today's crop of widespread 3.5% down FHA loans (in many states completely paid by the first time home buyer credit) sowing the seeds for the next generation of strategic defaulters, this "stimulus" will be with us for at least another half decade.  This transfer of wealth from savers to debtors has many far reaching effects, and I need to think them through even further as it becomes a growing part of US consumption ...

I created a 2.75% exposure to Discover Financial around $16.10.  It is obviously very important for the stock to hold $15.75 or the basis of this trade on a technical basis is kaput.

Long Discover Financial in fund; no personal position

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