Investor Essentials Daily

This company has risen with rates

April 23, 2024

By mid-2022, major economies worldwide faced severe inflation, with U.S. consumer prices rising at the highest rate since the 1980s, driven by factors such as pandemic-related supply chain disruptions, high energy costs due to geopolitical tensions, and demand from fiscal stimulus. 

In response, central banks like the U.S. Federal Reserve, initiated aggressive rate hikes, with the Fed raising rates to between 5.25% and 5.50% by mid-2023. 

This created an opportunity for Payoneer (PAYO), a global payments network, whose business model thrived under higher interest rates. 

Payoneer’s investment in low-risk securities yielded higher returns due to these rate hikes, boosting their investment income and achieving a historically high return on assets. 

However, the market remains cautious about potential future rate cuts impacting the company’s profits.

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By mid-2022, inflation had spiraled out of control in many major economies around the world.

Consumer prices in the U.S. were rising at rates not seen since the early 1980s, with the Consumer Price Index showing year-over-year inflation of over 9% in June.

The surge in prices was driven by multiple factors including global supply chain disruptions still lingering from the pandemic, high energy costs due to Russia’s invasion of Ukraine, and strong demand fueled by fiscal stimulus programs.

With inflation becoming entrenched, central banks were under increasing pressure to take decisive action.

In November 2022, the U.S. Federal Reserve implemented its fourth consecutive +75 bps interest rate hike, raising its target range for the federal funds rate to 3.75% – 4.00%.

Fed Chair Jerome Powell signaled more large increases were likely in the coming months to curb demand and bring inflation back down to the 2% target. Other major central banks including the European Central Bank and Bank of England also initiated aggressive tightening cycles.

Throughout 2023, the Fed delivered four more rate hikes, taking the target range to 5.25% – 5.50% by July, the highest in nearly 15 years. Other central banks matched the Fed’s resolve as well.

By mid-2023, interest rates had been increased to levels not seen in decades across developed economies as policymakers fought to regain control of prices.

In this monetary tightening, Payoneer (PAYO) was able to find an unexpected opportunity. The company’s unique business model proved perfectly positioned to benefit from higher rates.

Payoneer operates a global payments network that enables small and medium businesses to transact internationally. A key aspect of its business involves holding customer balances on its platform in trust until funds are disbursed.

The company maintains these customer balances in very liquid, low-risk investment-grade securities such as money market funds, U.S. Treasury bonds, and other short-term debt instruments.

This allows the company to generate stable investment returns on the funds.

As central banks rapidly increased interest rates, the yields available to Payoneer on its investment portfolio rose substantially with it. This provided a significant boost to investment income for Payoneer.

By effectively allocating customer balances across its investment grade portfolio, Payoneer was able to increase its Uniform return on assets ”ROA” to an all-time high of 43% with 37% asset growth.

Additionally, careful management of credit risk exposure also ensured the preservation of principal and liquidity to meet disbursement needs.

However, concerns about interest rate cuts have the firm trading at a 7x Uniform P/E. This reflects market worries that lower rates going forward could pressure Payoneer’s profit margins.

If Payoneer can continue expanding its customer base and balance sheet in the coming years, it may be able to offset some of the impacts of moderate rates.

The company’s focus on the fast-growing small business segment and innovations like new payment features also position it well for ongoing growth.

As such, if interest rates remain higher for longer or the company executes well on its strategy, Payoneer’s stock could appreciate from current levels.

That is why it is a great FA Alpha 50 name.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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