DFS: #3 tries harder

Discover Financial Services (DFS) is the Discover credit card. Also the Diners Club card. Also, it owns a bank and the PULSE payments network. I think of Discover as being one those companies that could proudly declaim, "When you're #3, you try harder."

This is a not a company that the Oracle of Omaha, Warren Buffett, would love. He wants #1 companies with the clout to dominate their respective markets. He's a Coke guy, not Pepsi. A Wal-Mart guy, not Target.

The Riverwoods, Illinois company Discover, ranking below Visa and Mastercard, is far from controlling its market. It is a smaller fish buffetted by bigger fish's waves.

DFS took off on a steep uptrend from $24.75 on Jan. 10 and, with two small corrections, rose to today's high (so far) of $29.35, its highest point since it was spun off as an independent company in 2007.

As has been common throughout the markets this year, the rise was accompanied by declining volume.

DFS had the most bullish chart of 21 added today to the Zacks top-buy list. The runner-up was DSW. TAM and KUB completed the final four.

DFS has a return on equity of 30% -- that's wildly profitable. However, it is ridden by long-term debt, which amounts to more than double equity. As terrible as that sounds, it is near the mid-range for financial services companies. DFS ranks as more aggressive in using debt than a bit under two-thirds of its peers.

Institutional ownership stands at 88%, on the high side, and the shares have been bid up to more than double sales parity. It takes $2.14 in stock to control a dollar in sales.

Next earnings will be announced on March 21. The stock goes ex-dividend sometime in March for a quarterly payout worth 1.37% annualized.

The stock is liquid, with average volume of 4.4 million shares, and has a full menu of options with narrow spreads and adequate open interest.

Implied volatility, at 31%, is at six-month lows. My trading vehicle of choice would be long options.

Decision for my account: I've bought calls for July expiration with a $26 strike.

Methodology

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.