Fintech Titans Visa and Mastercard Attracting Hedge Funds and Mutual Funds

Investment managers have been favoring financial stocks, particularly fintech companies, over AI stocks in recent quarters. Goldman Sachs' Ben Snider found that hedge funds increased their tilt toward financial stocks by 300 basis points last quarter, while mutual funds boosted their exposure to levels not seen since 2012 relative to benchmark indexes.

The two fintech stocks identified as 'shared favorites' among hedge fund and mutual fund managers are Visa (V) and Mastercard (MA). These companies have historically produced an annual return of 17%, outperforming the S&P 500 average by about two percentage points. Despite trading at a premium today, they're worth considering due to their strong competitive advantage and potential for long-term earnings growth.

Billionaire Bill Ackman described Visa and Mastercard as 'capital-light 'toll-takers' that earn a nominal fee on each transaction without taking any material risk, making them natural beneficiaries of higher inflation. Payment volume at both companies rose 10% year over year last quarter, driven by digital payments growth exceeding consumer spending.

The long-term potential for Visa and Mastercard is significant, with dominant market positions and network effects driving revenue growth. Although margin expansion has stalled in recent years, value-added services are expected to boost revenue growth, leading to faster earnings growth at both companies over the next few years. Ackman projects EPS growth of 16% to 18% for Visa and Mastercard during this period.

Wall Street analysts estimate average annualized EPS growth of 13.5% for Visa and 16% for Mastercard over the next two years, supporting the companies' long-term potential. Despite trading at 25 to 30 times earnings expectations, Visa and Mastercard can still be attractive investments due to their sustainable double-digit percentage level earnings growth.