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The Visa Stock IPO, Part II

The Backdoor Profit Play on Visa's Initial Public Offering

Written by Brian Hicks
Posted March 7, 2008

The biggest beneficiaries of Visa's IPO will be the Bank of America, Wells Fargo, and JP Morgan. Each stands to reap millions if they sell their stake, post-IPO. Citigroup and JP Morgan Chase cashed out their holdings post-MasterCard IPO and took one-time gains of more than $100 million.

How do you get a piece of the Visa IPO before it goes public?

Honestly, unless you have friends in high places, you can just about forget about getting pre-IPO shares. You'd have to wait and jump in on the Visa buying rush on the day of IPO, which may not be a bad idea. However, you could profit pre- and post-Visa IPO with the First Trust IPOX-100 Index (FPX).

According to reports, FPX tracks the U.S. IPOX-100 Index, which includes the 100 largest, typically best-performing, and most liquid IPOs in the U.S. The index measures the average performance of U.S. IPOs during the first 1,000 trading days.

fpx chart

We're not concerned with the latest dip since December 2007. When $21.4 billion worth of IPOs are shelved, it's unavoidable.

But on the heels of the mid-2006 MasterCard IPO (stock ran from $43 to $200 more than a year later), and the late 2006 First Solar IPO (stock ran from $24 to more than $220 a year later), FPX jetted from a 2006 low of about $18 to about $26 in a little over a year's time.

Imagine what an historic Visa IPO, which could fetch more than $18 billion, could do to help FPX significantly recover from its lows.

What gets me excited about the profit possibilities of the Visa IPO

Unlike industry Capital Ones and Discover Cards, Visa is a card processor, not a lender. That means it takes money from the banks that issue cards and doesn't extend credit. Smart move... It doesn't have to worry about cardholder debt. That concern lies with the banks that issue the cards.

That means that Visa won't have much exposure to the spiraling credit crisis, unlike others like Capital One and Discover that are watching share values plummet. They're the ones that have to be concerned that as of November 2007, credit card debt "soared at an 11.3 percent annual rate in November following an 8.5 percent rate of increase in October" and is still on the rise.

They're the ones where share values are being beaten stilly because of charge-offs, payment delays, and higher delinquencies. Why do you think Discover Financial Services (DFS:NYSE) stock plunged from a $35 IPO price to $15? It's a card lender, and concerns itself directly with cardholder debt.

But that's not the case for MasterCard and Visa. They, like we mentioned, are card issuers... not credit issuers. And because of that, they'll benefit as waves of struggling consumers turn to plastic to pay for rising food, and gas costs - all of which increase the fees that Visa would receive.

Consider this. In the U.S. alone, Visa is the biggest credit card company by market share, and has great presence in other countries, where people are "just starting to use plastic instead of cash," according to the Associated Press.

Even more impressive, "the 44 billion transactions totaling about $3.2 trillion that Visa processed in 2006 nearly doubled the number of transactions by MasterCard, its biggest competitor." Visa can even boast about having the world's largest retail electronic payments network.

And with homeowners struggling to stay above water, Visa, like MasterCard, shouldn't have a problem. They're benefiting as revolving credit has risen more than 11%, as of November 2007, as compared to the 6.1% of 2006 and the 3.1% of 2005.

In a market virtually frozen by credit and bank woes, and tumultuous economic uncertainty, Visa could put an end to pent-up salivating investor demand for any company not suffering from credit issues and Wall Street woes.

How the Fed Failed

$106 oil, $4 possibilities at the pump, crumbling housing numbers, higher inflationary risks, recession, geopolitical risks, and a much weaker dollar following Europe's decision to leave rates pat at 4% are still weighing heavily on Wall Street.

And when the "Oracle of Omaha" says we're in a recession, we're screwed. Indeed, despite political influence, we're in a recession. We may have to wait six months for the "experts" to make the official announcement, but truth is we're already there.

The Fed and stimulus plans to boost the stock market have failed miserably. Bernanke & Company's aggressive rate cutting has only destroyed the dollar after five rate cuts in six months. They cut 225 basis points and we're still sinking faster than Britney Spear's career.

Oil is at record highs. Gold is nearing $1,000, and the dollar is still plummeting against the Yen and the Euro. Oh, and inflation is at 26 year highs. Real estate is in the toilet. Credit is tight. Delinquencies and foreclosures are flying.

Heck, with the markets this low we could see another 75 basis point cut at the next meeting. Or maybe Congress will pass legislation to mail 300 million copies of "Don't Worry - Be Happy" to all Americans. It'll be mailed with a Bernanke smiley-face and deducted from your tax rebate checks.

Not only has Buffett declared utter disapproval with government moves, he doesn't see this sell-off as a buying opportunity.

But as we say, there's always a bull market somewhere... and you may find it with Visa and the First Trust IPOX-100 Index.

Ian L. Cooper
http://www.wealthdaily.com

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