Fiserv: a new financial trade
I have a relatively short trade check list (as opposed to a longer investment checklist). Each trade has to have clear answers to:
Risk/reward: Is this a 'fat' pitch? Mainly I'm looking for risk/rewards that make up for not necessarily being right on 50% of trades. That is, if upside is 3:1 and I'm right 50% of the time I'll still have a positive return on trading over time.
Time horizon: What's the time horizon for this trade to play out? Does it require a specific catalyst?
Is this a top notch/best of breed company? Companies that are best of breed or top notch in general have lower risk, and usually bounce back over time.
Confidence meter: How confident am I in this trade?
Fiserv at $165 satisfactorily addresses these issues.
I'll start off with the risks and what concerns me about Fiserv:
I'm not a chartist, but even to me the chart is broken. The company entered into an accelerating uptrend last year, and collapsed recently. A collapsed uptrend hasn't usually served me well in the past, especially this close to it.
This is a legacy company in a competitive business (payments). Clover, the business segment that has driven growth, has recently disappointed on volume growth and is in a very competitive environment. They compete with Toast, Shift4, Block and Global Payments. The latter two are both in refocusing efforts on restaurants and SMB businesses. A further deceleration in Clover would likely sink the stock further, and knowing the competitors they're up against this isn't THAT unlikely.
Having said that, I'll move on to what I do like about this trade, which addresses the above risks.
Risk/Reward: First, this is a trade that meets my risk-reward criteria. The stock is currently at $164, and I think I put a stop loss at ~155, which gives me around 5-7% downside but an upside of around $190-$200, which is about 30% upside. So, 5% down, 30% up. That meets my risk-reward for trades.
Time horizon: There's no clear catalyst for this trade to play out. One of three things would need to happen:
Clover stabilizing or re-acceleration of growth: This will likely only happen in the back half of the year (Q3 - Q4).
Market fears dying down and rewarding the company with a P/E more commensurate with historical norms for the company and the market as a whole.
Fiserv has a buyback with authority to buyback ~10% of shares which is quite a lot.
All three of the above require time, probably 6-12 months. That's the time horizon I allocate for trades in any event.
Fiserv’s P/E forward ratio Fiserv is best in breed amongst its legacy payment provider cohort. It's the market leader by far and has usually traded above its peers. Clover has been a clear winner in the SMB segment over the past few years. They have strong management, good capital allocation and unlike some of their competitors like Block, FIS and Global Payments have management focus and better execution track records.
I'm quite confident in this trade in its current setup:
While I don't see Clover growth accelerating greatly (I'm very bullish on Toast and Shift4 has also been executing very well), I don't see growth falling off a cliff either. Clover is a strong brand, the partnership with ADP makes tons of sense and Fiserv has a strong history of execution since acquiring First Data in 2019.
The buyback provides a nice floor of support, and Fiserv's financial profile isn't at risk since 50% of the business is as stable as they come and has nothing to do with the competitive merchant acquiring space.
The chart offers a clear risk/reward that fits my profile.
My portfolio has a fairly natural hedge with my Toast position. If Clover decelerates further, not for macro reasons, that's probably because Toast is taking more share.
An important risk to keep in mind is macro weakening which would affect Clover, as well as the entire space.
Due to the above, I'll be making this a 3% position from the get go.