Following its euphoric IPO and rally through May, Visa has begun to quickly run out of steam.
Similar to its rival MasterCard (NYSE: MA, Stock Forum), Visa (NYSE: V, Stock Forum) is a card processor and is not responsible for any of the debt that Visa cardholders rack up; that burden belongs to the issuing banks. The company draws its revenue from fees from the banks issuing its cards and the merchants accepting them. By market share, Visa is the largest credit card company in the United States. In 2006, the firm processed 44 billion transactions totaling roughly $3.2 trillion.
Following a euphoric initial public offering (IPO) in March and a stunning rally through the middle of May, Visa has begun to quickly run out of steam. Since peaking at $89.84 per share on May 7, the equity has plunged more than 22% compared to the S&P 500 Index's loss of only 9.4% for the same timeframe. Throughout this timeframe, V has met with persistent resistance at its declining 10-day and 20-day moving averages, placing the stock on a collision course with its IPO high of $69 per share – a level the stock has already been forced below once since May.
Despite the stock's fading technical prospects, Visa options players are charging bullishly forward. The stock's Schaeffer’s put/call open interest ratio (SOIR) of 0.42 indicates that calls more than double puts among near-term options. Furthermore, this ratio has trended lower during the past several weeks, dropping from a near-term peak of 0.52 on July 10 as calls are added at a faster rate than calls in the front three months of options. Data from the International Securities Exchange (ISE) supports this skew toward call volume. During the past 10 days, V calls bought to open on the ISE have outpaced purchased puts by a ratio of more than three to one. This attention to call buying amid the stock's intermediate-term decline has negative implications from a contrarian perspective.
From an open-interest standpoint, peak call open interest for the August series of options totals more than 18,000 contracts and resides at the out-of-the-money 80 strike. Meanwhile, peak put open interest for the month numbers about 10,000 contracts and rests at the 65 strike. This heavy-handed optimism skewed toward overhead call open interest indicates that investors still expect V to rally despite its poor technical downtrend.
Elsewhere, Wall Street has a bullish slant toward the underperformer – though not quite as ravenous as options traders. Zacks reports that 10 of the 18 analysts following V rate the shares a "buy" or better, with no "sell" ratings to be found. This configuration leaves room for potential downgrades that could pressure the security even lower. Furthermore, there is also the risk of price-target adjustments, as the consensus 12-month price target for V rests at $87.95 per share – a 20% premium to the stock's current trading range near $73 per share.
By Joseph Hargett
