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Stocks  | September 4, 2019

Nearly entirely recovered from its July tumble, Visa stock is approaching a new buy point, and is today's IBD 50 Stocks To Watch pick.

Visa (V) is forming a flat base with a 184.17 buy point. The relative strength line is at new highs, which is a bullish sign before a breakout occurs.

While that's positive for the stock, investors have to keep in mind that Visa stock has already made a monumental run since early 2017. That's when shares cleared a tiresome consolidation that lasted more than a year. Shares traded around 84 when the breakout happened, about 100 points less than at today's quotes.

MarketSmith pattern recognition shows the stock resetting its base count with a steep decline last December. That would give Visa fresh legs, technically. But this rests on the assumption Visa undercut a prior double-bottom base, which is questionable. A move past that entry was unconvincing and soon flopped. So, this base resets leaves doubts.

Still, Visa — a Dow Jones Industrial Average component — has some advantages, namely good fundamentals and a top industry group. The credit card and payment group is in the top 25 of 197 industry groups.

The company's year-over-year growth in earnings per share slowed from a 40% pace in Q2 of 2018 to 14% growth in Q2 for this year. Revenue increases remain in single digits or low double digits. But what it lacks in top- and bottom-line growth, Visa makes up in margins.

Its after-tax profit margins topped 50% the past seven quarters, an improvement over a long period of margins in the 40s. Pretax margin was 65.1% in the fiscal year ended in September 2018, the third straight year of 60%-plus marks. Yet, Visa has faced margin pressure from high client incentives.

Visa Stock And Its Steady Fundamentals

In it latest earnings report, Visa beat earnings and revenue estimates but trimmed its profit forecast for the fiscal year ending this month. The company forecast full-year EPS growth in the mid- to high teens from a prior estimate of gains in the high end of midteens. Management kept its full-year revenue estimate at low double-digit growth.

"While (Visa's) results were marked by reaccelerating payment volume and transaction growth, some investors were disappointed by (Visa's) revised outlook, viewing higher EPS growth as low quality because it stems from a combination of lower incentives and lower taxes more than offsetting higher expenses," Nomura Instinet analyst Bill Carcache wrote in a July 24 report.

Still, the analyst added, "We walked away from this quarter's results believing that (Visa) remains uniquely positioned to sustain midteens annual EPS growth against an uncertain macro backdrop, and we reiterate our Buy rating." Nomura also raised its price target on Visa stock to 204 from 178.

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