In the history of the U.S. economy, a handful of dates stand out as truly game-changing.
Examples include when insider trading was banned in 1934, the implementation of Medicare in 1965, the issuing of the first bank credit card in 1946, and the April day in 2001 when the New York Stock Exchange switched to using decimal prices instead of fractions.
Each of those events left an indelible mark on the U.S. economy -- and earned prescient investors a pretty penny in profits. Another game-changing date is on the horizon, one for which investors can begin preparing now.
On Oct. 1, 2015, Visa (NYSE: V) is scheduled to reverse liability on fraudulent credit card transactions. Historically, credit card companies have taken responsibility for fraudulent transactions -- but on that date, Visa will no longer absorb the losses from fraud stemming from traditional swipe-and-sign credit cards. Visa will instead transfer those losses to the merchants themselves.
This is the endgame in the long process of switching U.S. consumers and merchants to the worldwide standard of EMV payment technology. The United States is the last major market to adopt EMV, which is expected to be the accepted standard by October 2015.
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EMV -- short for Europay, MasterCard (NYSE: MA) and Visa, the companies that created the process -- is a global standard requiring microchip-equipped smart cards instead of cards with magnetic stripes. EMV also requires a personal identification number (PIN) rather than a signature. The purpose of EMV protocol is to reduce fraud and create a single global payment system to streamline operation for the credit card issuers.
A group known as EMVCo (which counts American Express (NYSE: AXP) and Discover as members, along with Visa and MasterCard) is dedicated to the standardization of EMV specifications. The changeover will require some merchants to add an external PIN keypad; other merchants may be forced to upgrade their entire point-of-sale system.
|© NXP Semiconductors|
|NXP creates specialized smart chips for EMV-compliant credit cards. The company boasts nearly 80% of the market for contact-less credit cards globally.|
The changeover will be a radical one for most U.S. consumers. Many will probably be surprised at no longer having to sign for their credit card purchases. However, the U.S. switch to EMV standards has been in the works for the past several years, so I don't expect the transition to have any effects on the card issuers' stocks.
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However, there are two companies that I think will continue to profit from the EMV changeover: NXP Semiconductors (Nasdaq: NXPI) and Gemalto (GTOMY). For now, let's take a closer look at U.S.-based NXP.
NXP creates specialized smart chips for EMV-compliant credit cards. The company boasts nearly 80% of the market for contact-less credit cards globally. NXP will likely continue to profit as U.S. consumers' swipe-and-sign cards are replaced by EMV cards.
NXP's earnings per share (EPS) jumped more than 70% last year, and EPS growth is projected to be close to 30% this year. In addition, NXP's gross profit margin soared over 45%. This strong performance sent share prices upward nearly 40% last year. This year has seen a continuation of that uptrend, as NXPI has risen from near $43 to above $56 since early January.
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Active trading by hedge fund kings such as Daniel Loeb and George Soros has also helped to lift the share price. Last June, Loeb sold his position and Soros dumped over 50% of his holdings -- but they both had purchased more shares by the end of 2013.
Risks to Consider: While the EMV protocol is the future for U.S. credit cards, other fraud-resistant technologies could be right around the corner. Always use stop-loss orders and diversify when investing.
Action to Take --> I like NXP Semiconductors as a play on the EMV changeover. Buying now in the $56 to $57 range with stops at $51 and a 52-week target price of $75 makes solid investing sense and represents better than 30% upside.