After rising 210%, best avoid uncovering financial stocks for now


[Updated 12/8/2020] Discover the financial update

We think there may be better places for your money than Discover Financial (NYSE:DFS) stocks right now. DFS is currently trading at $83 and is 9% ahead of its pre-Covid high in February. Additionally, DFS stock has gained 210% from lows of $27 seen in March 2020, after the multi-billion dollar stimulus package announced by the US government largely helped the stock market recover. The stock dominates broader markets by a huge margin (the S&P 500 is up about 65% from March lows) as investors are optimistic about growing consumer demand over the coming months , leading to growth in outstanding credit card loans.

The credit card giant is heavily dependent on its credit card business (which contributed around 76% of its revenue in 2019), following a global economic meltdown and widespread panic, revenue from credit cards were negatively impacted due to lower consumer demand. As Discover beat consensus estimates in its recently released third-quarter results, it reported revenue of $2.7 billion, down 6% from a year earlier. Notably, it nearly doubled its provision for credit losses to $4.6 billion for the first nine months on an annual basis, to address the higher risk of default. However, as the economy returns to normal, we expect consumer demand and its customers’ loan repayment capacity to improve over the coming months. Given the strong rally in Discover Financial Services stock since late March, we believe the stock has little room for growth in the near future, even after factoring in an expected improvement in demand despite the recent surge. of the number of new Covid-19 cases in the United States Our conclusion is based on our detailed analysis of See how Financial stocks performed during the current crisis alongside that during the 2008 recession in an interactive dashboard analysis.

[Updated 10/08/2020] Find out which financial stocks still have room to grow

We believe Discover Financial (NYSE: DFS) stock has strong upside potential of 16% in the near term. DFS is currently trading at $64 and its value has lost 23% since the start of the year. It traded at a pre-Covid high of $74 in February and is currently 14% below that level. Additionally, DFS stock has gained 144% from the low of $26 seen in March 2020, after the multi-billion dollar stimulus package announced by the US government helped stock prices recover in a certain extent. That said, the stock is dominating the broader markets by a wide margin (the S&P 500 is up 50%) as investors are positive about growing consumer demand over the next few months, leading to an increase transaction volumes and credit card loans. Despite significant improvement in DFS stock since late March, we believe the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of See how Financial stocks performed during the current crisis alongside that during the 2008 recession in an interactive dashboard analysis.

Coronavirus crisis 2020

Timeline of the 2020 crisis so far:

  • 12/12/2019: First cases of coronavirus reported in China
  • 01/31/2020: WHO declares a global health emergency.
  • 02/19/2020: Signs of an effective containment in China and hopes for monetary easing by major central banks help the S&P 500 hit a record high
  • 03/23/2020: S&P 500 34% drop since peaking on February 19, as COVID-19 cases accelerate outside China. Doesn’t help oil prices crash in mid-March amid Saudi-led price war
  • Since 03/24/2020: S&P 500 recover 50% since lows seen on March 23, as the Fed’s multi-billion dollar stimulus package removes short-term survival anxiety and injects liquidity into the system.

In contrast, here’s how DFS and the wider market fared during the 2007/2008 crisis.

Timeline of the 2007-08 crisis

  • 01/10/2007: Approximate pre-crisis peak of the S&P 500 index
  • 09/01/2008 – 10/01/2008: Accelerated decline in the market corresponding to Lehman’s bankruptcy filing (09/15/08)
  • 03/01/2009: approximate trough of the S&P 500 index
  • 01/01/2010: initial recovery to pre-accelerated decline levels (around 09/01/2008)

See financial performance against the S&P 500 during the 2007-08 financial crisis

DFS stock fell from levels of around $17 in October 2007 (the pre-crisis high) to around $5 in March 2009 (when markets bottomed), implying that the stock lost up to 73% of its value compared to its approximate pre-crisis level. peak of crisis. This marked a steeper decline than the broader S&P index, which fell around 51%.

However, the DFS rebounded strongly after the 2008 crisis reaching around $12 in early 2010 – rising 159% between March 2009 and January 2010. By comparison, the S&P rebounded around 48% on the same period.

Discover the fundamentals of Financial over the past few years

Discover Financial’s revenue grew 52% from $7.9 billion in 2015 to $12 billion in 2019, driven primarily by growth in the credit card industry. Additionally, the company’s net income increased from $2.2 billion to $2.9 billion, resulting in strong EPS growth from $5.14 in 2015 to $9.09 in 2019. the quarter went from $2.32 in Q2 2019 to -$1.20 in Q2 2020 due to a large increase in the provision for credit losses.


Phases of the Covid-19 crisis:

  • Beginning to mid-March 2020: To fear of the rapid spread of the coronavirus epidemic is reflected in realitythe number of cases accelerating globally
  • From the end of March 2020: Social distancing measures + confinements
  • April 2020: Fed stimulus removes short-term survival anxiety
  • May-June 2020: Resumption of requestwith the gradual lifting of confinements – no more panic despite a constant increase in the number of cases
  • July-October 2020: Poor results in Q2 and mixed expectations in Q3, but persistent improvement in demand, a decrease in the number of new cases, and Advances in Vaccine Development Boost Market Sentiment

Bearing in mind the trajectory over 2009-10 and due to the improvement in Discover Financial shares since late March, this suggests a potential rally to around $74 (up 16%) once economic conditions begin. to show signs of improvement. This marks a full recovery to the $74 level Discover Financial’s stock was at before the coronavirus outbreak escalated globally.

What if you were looking for a more balanced portfolio instead? here is a high quality wallet to beat the marketwith a return of over 100% since 2016, compared to 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy earnings, plenty of cash and low risk, it has outperformed the broader market year after year, consistently.

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