The payments king is dead, long live the new king!
As 2023 draws to a close, we’re revisiting select Investor Essentials Daily articles from this year that stood out.
In a year characterized by economic concerns and geopolitical conflicts, many investors were still laser-focused on how interest rates and inflation affect the markets. Others, on the other hand, took advantage of pockets of substantial growth to identify potentially outperforming stocks despite fears of another U.S. recession.
One of the companies we featured as one of our stock picks is up more than 20% since we issued the article back in May.
Here is what we originally wrote for Global Payments (GPN).
Investor Essentials Daily:
Tuesday FA Alpha 50
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Cash is not king anymore.
E-commerce is immensely growing, and has already started changing how we pay. The disruption has led to banks increasing their offerings and large tech conglomerates like Apple (AAPL) introducing alternative payment solutions such as Apple Pay.
The pandemic was the latest accelerator and helped us get far closer to the end goal of not using cash at all.
According to The World Bank, the percentage of adults having bank accounts surged from 68% in 2017 to 76% in 2022. Two-thirds of us now make or receive a digital payment.
This is not only happening in developed countries. The share of developing economies in worldwide digital payments grew from 35% in 2014 to 57% in 2021.
It is safe to say that digital payments are already the norm in many areas. Today, it is time to have serious discussions about what the payments industry will look like in the future.
The Fed has been looking into a possible U.S. Central Bank Digital Currency to help solidify digital payments as the only real option going forward.
We are talking about a truly cashless society, and there are some big beneficiaries of this transformation.
One company, in particular, has been at the helm of building the world’s digital payment infrastructure from the back end. That company is Global Payments (GPN).
It provides international payment technology and software solutions for cards, checks, and digital-based payments.
Global Payments thrived as digital payments increased their share of the whole payments market. Its Uniform return on assets (“ROA”) has been above 40% for the last six years.
We saw how it benefits from the transformation in payments, especially during the pandemic. The company’s ROA jumped from 56% in 2020 to above 70% in 2021 in just one year.
Take a look at it yourself…
It is clear that the world will continue its transition to a cashless society. That means constant investments in digital payment infrastructure.
Global Payments is on the receiving end of these investments, which helps it grow like crazy.
Yet, the market chooses to ignore the obvious. Global Payments’ stock is trading at a Uniform price-to-book ratio (“P/B”) of 7.1x and a Uniform price-to-earnings ratio (“P/E”) of 16.7x.
That P/B is the lowest since 2015, and the P/E is on the lower end of what the stock has been trading at.
The market fails to see the surge of digital payments and is the biggest beneficiary of this trend.
That is why Global Payments showed up on our screen. Its high returns, high growth, sustainability of those, and low valuation make it 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 here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research