A “Masterful” Bet on a U.S. Economic Recovery

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
Global stock markets endured a bad week, as the S&P 500 pulled back below key support levels at 1,220. As a result, you stopped out of your position in Celcom Israel (CEL) at a loss. Nevertheless, with the seasonality of the market positive, I am inclined to stay with my bullish bias through the end of the year.
Now, if you’re like most investors, you think that the U.S. economy is down and out. Yet, change is in the air. Economists quietly are upping their estimates for U.S. growth for the fourth quarter and are now thinking that the U.S. economy will end 2011 growing at its fastest clip in 18 months. JPMorgan Chase now sees U.S. Gross Domestic Product (GDP) rising 3% in the final quarter, while Morgan Stanley boosted its estimates to 3.5%. That pace would make the U.S. economy one of the top performers on the planet.
That’s also good news for U.S.-based companies, such as MasterCard Incorporated (MA), which are a play on the rebound in U.S. consumer spending.
MasterCard is the world’s second-biggest payment network after Visa (V). As you know, MasterCard provides a variety of services in support of the credit, debit, prepaid and related payment programs. Serving approximately 22,000 financial institutions, think of MasterCard as a financial toll road, making its money on each of these transactions. In doing so, MasterCard racks up $545 billion in transactions each year.
Even with the U.S. economy in the doldrums, MasterCard has been making a mint from the global trend toward a switch to cashless payments — whether using credit cards or debit cards. And there is plenty of upside left. Almost nine out of 10 transactions across the globe still take place in cash. And today, that portion is even lower in fast-developing markets in Asia, the Middle East and Latin America. Yet if its current pace of growth continues, China will overtake the United States as the world’s largest credit card market by the end of the decade.
In a sign of things to come, MasterCard is also partnering with Google (GOOG), Intel (INTC) and Citigroup (C) to offer smartphone-based transactions through MasterCard’s PayPass payment technology. When consumers use the new system, they will be able to pay for online purchases with a simple tap of their PayPass-enabled card, tag or smartphone on an Ultrabook device. With online sales reaching $176.2 billion last year in the United States alone, the potential for this technology is vast.
The company recently reported a 38% jump in third-quarter profit and a 27% jump in revenue as spending and transactions made with its credit and debit cards increased. MasterCard is projected to grow earnings by 19.6% next year. No wonder MasterCard has attracted the attention of Warren Buffett, who recently boosted Berkshire Hathaway’s stake in the company. MasterCard also recently announced that it is buying back roughly 5% of its shares outstanding — a sure sign of confidence by senior management.
Barclays Capital has a price target of $410.00 on shares of MasterCard. That’s a nice 13.75% upside from its close on Friday. But with the tailwind of U.S. economic recovery behind it, I think it will go much higher than that.
So, buy MasterCard at market today, and place your stop at $310.00. For potentially even bigger gains, I recommend the April 2012 $370 calls (MA120421C00370000).

Portfolio Update

Alexion Pharmaceuticals (ALXN) remained flat for the week, dipping just 0.20%. Alexion drug Soliris is yielding positive results in the treatment of four other diseases, broadening its potential market. Piper Jaffray & Co., estimates that Alexion’s revenue stream was near $800 million this year, but could see peak sales soar above $5 billion. ALXN is just below its 50-day moving average and is a HOLD.
Bank of Ireland (IRE) fell 8.98% last week. The Irish government recently extended its “Eligible Liabilities Guarantee” through 2012 as it has seen signs of improvement in its banking sector. This is a government guarantee to back Ireland’s depositors and bondholders. IRE is currently a HOLD.
National Bank of Greece SA (NBG) dropped 14.04% over the past five trading days. NBG continues to have a surprisingly liquid balance sheet and a market capitalization of over $2 billion. The benefits of holding this position are $0.50 to the downside, but 5 to 10 times as much on the upside. Now that your position is hedged by your May 2012 put options in this stock. NBG remains a HOLD.
Spreadtrum Communications, Inc. (SPRD) gave back 5.22% last week. SPRD is taking a breather since recently reporting a great quarter and hitting its 52-week high. Expect this position to roll in a trading range for a bit as investors adjust their holdings in this stock. SPRD is a BUY.
iPath DJ-UBS Livestock TR Sub-Idx ETN (COW) managed to stay on the bull this week to post a 0.39% gain. COW ended the week directly on its 50-day moving average (MA). This is the third time COW has touched its 50-day MA in as many weeks, and has bounced back each time. Closing Friday just one cent below its 50-day MA, COW is a HOLD for the moment.
Companhia de Bebidas Das Americas (ABV) dipped 3.13% last week. Recent Q3 reports from investment firms such as Cantillon Capital Management, Renaissance Technologies and Two Sigma Investments show AmBev firmly in place in its stated holdings and large purchases. AmBev should rise as the larger investment firms buy up this position. ABV bounced off of its 50-day moving average on Friday and is a BUY.
ProShares Ultra S&P500 (SSO) lost 7.36%. SSO held its 50-day moving average Thursday and Friday as the broader markets pulled back last week. News out of Europe did nothing to boost investor confidence and hurt the major averages. The coming holiday-shortened week normally sees light trading volume as traders are away on vacation. If SSO continues to hold its 50-day moving average, this is a good buying opportunity. SSO is a BUY.

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