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Like many true growth stocks, Mastercard (MA) has rebounded sharply after the coronavirus bear market bottomed out in late March. The giant in payment processing finished the third quarter of 2020 with a 14.3% gain. And roughly three months ago, MA stock staged a new breakout past a proper buy point at 316.16.
However, shares have now given back all of its gain from that entry point near 316 and more. The reason? The damage caused by Covid-19 on the travel, retail and entertainment industries have pinched Mastercard’s financial performance in a painful way.
Please read more detail on Mastercard’s surprise earnings and revenue miss in its third-quarter results in this story.
Mastercard shares had rebounded as much as 84% from its March 23 low of 199.99. That edges out a 64% gain by the S&P 500 over the same time frame.
But today, Mastercard is now triggering a change in the character of its stock. In the space of just two weeks, it caved below the key 50-day moving average. And on Thursday, while shares rebounded mildly, they have now sunk beneath the longer-term 200-day moving average.
The 200-day moving average plots a stock’s average closing price over the past 200 sessions, or roughly 10 months of action. You want to see a growth stock rise above the 200-day and lead it higher as well.
So is MA stock a buy now?
This story analyzes Mastercard’s business fundamentals, technical action, and the state of institutional ownership in MA stock. It will also highlight the proper buy point if the stock potential for a breakout to new highs — the best time to buy top growth stocks from a risk-vs.-reward point of view.
Shares had climbed adroitly after the company reported second-quarter results on July 30. Analysts polled by FactSet saw earnings falling 39% vs. year-ago levels to $1.16 a share on a 21% drop in revenue to $3.25 billion. Mastercard earnings came in at $1.36 — down 28% vs. a year ago, but still smashing the consensus view by 20 cents.
Revenue fell 19% to $3.34 billion, also beating the consensus view. Net margin fell 600 basis points vs. the same quarter a year ago but still held strong at 41.1%.
Please see more detail on Mastercard second-quarter results in this IBD story.
Q3 results, however, stretched Mastercard’s year-over-year decline in the top line (revenue of $3.84 billion, down 14% vs. a year earlier) and the bottom line ($1.60 in earnings per share, down 26%).
Indeed, the year-over-year declines in the top and bottom lines shed more light on how coronavirus-related shutdowns have punctured consumer spending, especially at restaurants, bars and other indoor entertainment venues. On an annual basis, Mastercard earnings have grown each year since 2004. It’s never posted an annual drop in the top line since at least 2001.
Mastercard Stock History
Founded as an alliance of regional bank card associations on Dec. 16, 1966, Mastercard first held the name “Interbank.” Then it changed to “Master Charge” from 1969 to 1979.
Today, “Mastercard” is one of a few household names that define the concept of the credit card. But it’s also grown into a powerhouse in the field of processing debit card transactions.
Recently, the company has made it a mission to give more people access to electronic-based finance. So it’s touted a goal of helping 1 billion individuals connect to the digital economy by the year 2025. To achieve this goal, the Purchase, N.Y., company seeks to help 50 million small and micro merchants have access to financial services, “with a direct focus on providing 25 million women entrepreneurs with solutions that can help them grow their businesses,” according to the company website.
On June 15, the company unveiled a plan to allow Brazilian consumers send and receive money to and from friends and family members via WhatsApp. (Please see this recent IBD Stock Of The Day piece for more news and strategic plans by Mastercard to grow its business.) On Aug. 25, Mastercard announced in a study of small businesses across North America that 76% say the Covid-19 pandemic prompted them to become more digital, “with 82% changing how their business sends and receives payments.”
Mastercard offers data insights on consumer spending trends.
On Sept. 1, Mastercard reported that Italy, Russia, France and Australia “are leading in terms of the recovery of travel and entertainment spending across the G20,” according to a recent news release. “Despite being a focus of the pandemic earlier this year, Italy’s significant restaurant culture and extensive domestic tourism industry have helped it to bounce back faster than other markets, including the U.S., Brazil and India.”
Decisions by France, Spain and Italy this past week to impose strict curfews and shut businesses including bars and restaurants will likely produce new analyses.
A Tremendous Run By MA Stock
The company, which went public in May 2006 at 39 a share, split its shares 10-for-1 in January 2014. Therefore, without question, MA stock has accomplished a monster run. Three weeks after its debut, the stock cooled off and essentially moved sideways for seven weeks and formed one of the most bullish chart patterns among leading growth stocks: the flat base.
In the week ended Aug. 4, 2006, MA stock cleared the high of that base — 5.06, adjusted for the 10-1 split — in heavy volume. This breakout set the stage for a 6,760% run to a 347.25 new high set on Feb. 20 this year. So, over a nearly 14-year span, Mastercard stock has delivered a compounded annual growth rate of 37%.
You can set custom time periods for historical daily, weekly and monthly charts of Mastercard at MarketSmith.
Mastercard’s market value has now grown to around $340 billion, with 1 billion shares outstanding and a float of 983 million.
MA stock also offers a quarterly cash dividend of 40 cents a share, good for an annualized yield of 0.5%. It made the payout on Aug. 7 to holders of record as of July 9. The S&P 500 currently shows a yield of 1.7%.
MA Stock Chart Analysis
Mastercard’s prior peak of 347.25 came just days before the Feb. 25 IBD Big Picture column downgraded the outlook for stocks to “market in correction” from “uptrend under pressure.” A correction is the best time to ease off margin, cut losses, take profits in some stocks, and wait for market conditions to improve.
MA shares dropped 42% from that high. Such a decline has actually been common among top-performing growth stocks. The reason? Market leaders tend to fall 1-1/2 to 2-1/2 times the decline seen in the S&P 500 or the Nasdaq composite.
So, Mastercard fell only mildly more than the 34% correction by the S&P 500. This signals large investors — mutual funds, banks, insurers, pension funds and the like — were not overly anxious to dump their holdings.
As a daily chart shows, MA stock bottomed out near 200, a round number and key psychological price level. Then in March and April, it marked several strong up days in heavy volume.
Let’s look at March 25, April 6 and April 29. On all three sessions, MA stock gapped up and finished bullishly in heavy volume. Such price-and-volume action strongly hints at intense accumulation of shares by the institutional crowd.
In a gap-up in price, the session’s price low holds above the highest price of the prior session.
In all, MA stock spent nearly five months crafting a large cup with handle.
To find the buy point, add 10 cents to the highest price within the handle, or 316.06. The handle represents a final shakeout of disgruntled shareholders who have been sitting with losses in the stock, waiting for it to rebound.
Mastercard Stock Ratings Vs. Its Industry Peers
The Composite Rating combines key fundamental factors (earnings-per-share gains, sales increases, profit margins and return on equity), a stock’s price action vs. the entire IBD database, and trends in mutual fund ownership.
In general, only companies with a 90 Composite or higher deserve a spot on your watchlist for excellent growth stocks.
The EPS Rating of 77 represents a sharp drop from 94 roughly six months ago.
The 49 Relative Strength Rating is now a sour note, down sharply from an 80 in September. During the breakout, it was 71. However, it’s not uncommon for large and megacap stocks to show an RS Rating below 80 ahead of its breakout — especially if they’re trying to stage a turnaround in their business.
Institutional sponsorship remains strong. At the end of the third quarter, 4,339 mutual funds owned shares in Mastercard, according to the data block on a MarketSmith weekly chart. That’s up from 3,852 funds in the third quarter of 2019. Top growth funds that own shares include Fidelity Contrafund (FCNTX), Janus Henderson Forty (JFRDX), Wells Fargo Growth (SGRAX) and Fidelity Magellan (FMAGX).
The stock has successfully tested institutional buying support near 300 and continues to ride on the north side of its 50-day moving average.
Current MA Stock Action
From late September, Mastercard had enjoyed institutional buying support along its 10-week moving average.
That ended in the week ended Oct. 23. Shares fell 2.9% for the week. While volume came in light, Mastercard made its first close below this key technical level since its early August breakout.
This week, investors pulled the rug out from underneath the stock. Through Thursday, it’s suffered an 11% drop in heavy turnover that’s already more than double its typical levels over the past 10 weeks.
So for now, MA stock is no longer a buy.
Keep watching the stock to see when the sellers get exhausted. Eventually, buyers will take control. But Mastercard will need a lot of time and work to build a complete new base that sets up a potential stunning breakout to new highs.
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