Two Growth Stocks to Buy on Their 50-Day Moving Averages

TheStreet.com

NEW YORK (TheStreet) -- Everyone seems to be freaking out about this "correction." Although the S&P 500 is down about 7% from its highs, it still has a double-digit return since the start of the year.

Also, when you compare U.S. equity markets to other asset classes such as fixed income and emerging-markets, the selloff has been extremely orderly.

China was down more than 5% the other day. The 10-year Treasury note has plummeted in the last month. Can you imagine the pandemonium if the Dow Jones or S&P 500 was off by 5% in a single session?

Emerging markets have also seen down days of 2%-3% or more over the past month.

Let's face it, our selloff was both anticipated and calm compared to other investment areas. In fact, with a little protection, you could have profited on the downside, while staying long equities over the past couple of weeks.

However, whether long, short, or flat through this selloff, there's one place where investors can park their money and not worry about getting their face ripped off in the event that there is further selling headed our way for the rest of summer.

I'm talking about credit card giants Visa and Mastercard .

Both stocks have performed incredibly well this year, with Visa up 17.6% and Mastercard up 14.5%. The following table shows just how strong its performance has been compared with the exchange-traded fund that tracks the S&P 500, the SPDR S&P 500 ETF:

Wow, talk about monster returns. Although the broader market has performed exceptionally well considering all of the drama that we've experience in the previous three years, Visa and Mastercard have crushed those returns.

Of the two, Visa underperformed over the three-year time frame, yet still tripled the returns of the SPY. Why stop now?

Although only down fractionally over the previous four weeks, both names actually tested -- and momentarily broke through -- their 50-day simple moving average. While the moving average is a lagging indicator, it does help identify the trend and can act as support.

The move from cash and checks to plastic is on, and these two companies control 83% of the outstanding credit card market. Visa has a the larger market share, at 49.6%, vs. 33.4% for MasterCard, but it hardly matters. Deciding between the two is much too time-consuming when you can just own both.

Based on the returns above, it seems silly to contemplate which one is better. Consumers charged more than $50 billion to credit cards in 2012, five times the figure for 2010, and cash-only transaction are clearly on the decline. This is directly reflected in the companies projected growth estimates.

Take for example, Visa's forward 12-month price-to-earnings ratio of 20.74. With high growth names, it's almost pointless to look at a trailing ratio because the price moves so quickly from where the growth was a year ago. Paying 20 times a company's earnings seems reasonable when its earnings per share are set to grow at about 18.5% in the next year, with revenues increasing more than 12%.

Mastercard tells a similar story, with earnings per share growing at 16% and revenues growing 12.1%. Although revenue growth is roughly in line with Visa's, earnings per share estimates are slightly lower. However, this is justified with a lower forward P/E ratio of 18.75.

What's more, both of these companies are all cash -- no pun intended. Both Visa and Mastercard have a beautiful balance sheet, with zero long-term and short-term debt.

There's probably nothing worse than finding what you thought was a great company, only to see that it has a mountain full of toxic debt. Conversely, there may be nothing better than finding a great company with zero debt. Actually there is -- finding two companies.

The technical picture is almost as bright as the fundamental one. Over the last three years, it's hard to find prettier charts than those for these two companies. It's a straight march higher with no signs of slowing down.

V Chart
V data by YCharts

MA Chart
MA data by YCharts

To make traders really giddy, almost every time the two stocks come down to their 50-day simple moving average, they become overwhelming buys. Well, that time is here, or at least, it was. While they have had a solid bounce, it's not too late. I was able to sell puts on Visa but failed to do so with Mastercard.

Although I am long both names, I wouldn't mind being a tad bit more long if assigned. However, I'll be honest and say that this is a trade and that my expectations are that neither name will be designated for assignment. I am looking to sell slightly out-the-money puts to collect premium and possibly open the door for assignment should the selloff continue.

I am totally fine with holding both quality growth companies and will look to sell upward calls against the position if I am assigned.

At the time of publication, Kenwell was long V and MA.

-- Written by Bret Kenwell in Petoskey, Mich. .

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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