This Just In: More Upgrades and Downgrades

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)

Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about...

What's in your wallet?
With the U.S. economy on the brink (and Europe's apparently in free fall), worries abound. Yet smart stock shoppers know that stocks "climb a wall of worry." Even as the Dow Jones Industrial Average (INDEX: ^DJI) plays pinball with our portfolios, and concerns over consumer spending look particularly piqued, one analyst has clambered out on a limb and made a brave pronouncement: It's time to bet on the American consumer. It's time to invest in credit card companies.

The analyst in question is a Chicago shop by the name of Guggenheim Capital. And the stock it wants you to buy is MasterCard (NYS: MA) . After surveying the shares of Discover Financial (NYS: DFS) , Visa (NYS: V) , and MasterCard yesterday, Guggenheim concluded that only MasterCard offers investors a real bargain.

Put it on the card?
Is Guggenheim right? I admit -- at first glance, the numbers look tempting. Visa and MasterCard have identical forward P/E ratios of 14.7, and forward growth rates approaching 20% annually. (Most analysts give a slight edge on growth rates to MasterCard.) On the other hand, as a pure question of valuation, Discover seems to trump both of its bigger rivals. While a slower grower, Discover's seven forward P/E ratio seems to make it a more compelling bargain.

Coincidentally, at the same time Guggenheim was publishing its recommendation, StreetInsider.com reported that Jefferies & Co. was saying nice things about Discover while sidelining shares of Capital One (NYS: COF) and American Express (NYS: AXP) . According to Jefferies, not only is Discover the cheaper stock, it's also improving its "early stage delinquencies and roll rates ... outpacing all other credit card trusts. ... We are projecting DFS to have the longest runway prior to credit normalization out of all major credit card lenders."

Charge?
Discover's superiority in credit cards could be the key. As you've probably heard by now, over at Bank of America (NYS: BAC) there's a new plan to levy $5 monthly fees on anyone who pulls out a card and makes a debit transaction. That's almost certain to deter consumers from using debit to pay for their purchases going forward, and push them toward credit instead. When you consider that both MasterCard and Visa are big issuers of debit plastic, while Discover is not, this seems to suggest that the two bigger companies have significantly more exposure to B of A's ill-considered action than does Discover.

Foolish takeaway
With one earnings season done and the next not yet begun, I recently completed my quarterly update of stock valuations -- making my wishlist, and checking it twice -- to make sure I'm ready to profit when the next big market sell-off rolls around. As it so happens, both Visa and MasterCard are on this shopping list, and while I found both stocks starting to look attractive, I must admit that neither one quite set off any "deep value" alarm bells for me.

In contrast, the more I look at Discover, the more I like it. In addition to its sub-seven trailing and forward P/E ratios, Discover also boasts a temptingly low enterprise-value-to-free-cash-flow ratio. At 6.7 EV/FCF, the stock looks more than cheap based on its 10% growth estimates. Ice the cake with a 1% dividend (modest, but still superior to anything Visa or MasterCard offer), and Discover gets my vote as the best bargain in credit cards this week. Give it a look -- I think you'll like what you see.

Discover may be the best bet in credit cards, but it's not the only stock worth watching. Click below to add any (or all) of the major players to your Fool watchlist:

At the time this article was published Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 267 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Bank of America and MasterCard. Motley Fool newsletter services have recommended buying shares of Visa and writing a covered strangle position in American Express.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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