Is it Time to DUMP Credit Card Stocks?

Credit card company stocks have charged significantly higher this year. Plastic-names such as Discover Financial Services (NYSE:DFS) and American Express Co. (NYSE:AXP) have easily outperformed the S&P 500 in 2012. Whether its for convenience on the go, or necessity in a sluggish economy, people continue to rely on credit cards in their daily lives. However, a recent round of downgrades in the industry may give investors the perfect excuse to book profits.

On Monday, UBS Investment Research downgraded Visa Inc. (NYSE:V) and MasterCard Inc. (NYSE:MA), which operate the world’s largest card-payments networks. The firm downgraded both payment processors to Sell from Neutral, citing concerns about lower consumer spending. “We believe both companies’ exposure to a slowing consumer spending backdrop makes a slowdown in key metrics simply unavoidable,” UBS analyst John Williams explained in a note, according to Reuters. In May, consumer spending remained flat, the first time in six months it did not increase.

Don’t Miss: Warren Buffett Picks a WINNER with Walmart

UBS lowered its price target on Visa to $113 from $127 per share, and cut MasterCard’s price target to $403, down from $457. The bank also reduced Visa’s earnings per share estimate for 2012 by 1 penny to $6.02 and MasterCard’s by 12 cents to $22.01.

As the chart above shows, it has still been a strong year for charge companies. Shares of Visa and Mastercard have gained 18.86 percent and 11.97 percent, respectively. Meanwhile, Discover and American Express shares have surged 43.58 percent and 23 percent, respectively. The S&P 500 index has only gained about 6.66 percent year-to-date.

Although the downgrades weighed on credit card stocks, another report paints an improving picture for the industry. Domestic delinquencies on credit cards declined to their lowest levels in at least two decades, providing a potential catalyst for upbeat earnings. As long time readers know, a ‘Catalyst for a Stock’s Movement’ is the ‘C’ in our CHEAT SHEET investing framework. According to Barclays Capital (NYSE:BCS), the six biggest U.S. credit card lenders, including JPMorgan Chase (NYSE:JPM), Bank of America Corp. (NYSE:BAC) and Citigroup Inc. (NYSE:C), the average delinquency rate has decreased to 2.35 percent, down from above 6 percent in early 2009. Discover’s delinquency rate fell to 1.91 percent in the most recent quarter, compared to 5.6 percent in November 2009.

Late Monday, a report by the Federal Reserve also showed that consumers still have an appetite for debt. Consumer credit grew from April by a seasonally adjusted $17.12 billion to $2.573 trillion in May. Revolving credit, which includes credit card spending, jumped by $8 billion, the largest gain since November 2007.

Investor Insight: Essential Earnings Reports You MUST Evaluate This Week