Can soaring prices drive Visa stock higher?
— -- A: Merchants have a love-hate relationship with credit card companies like Visa.
On one hand, merchants like how quickly credit, and debit, card transactions are processed and are happy to carry less cash in the store. And to some point, merchants must accept credit cards to remain competitive. But, at the same time, the fees merchants pay to credit card companies sting even more during periods of inflation.
Gas stations, for instance, may pay a 2% charge on gasoline bought using credit cards. That fee would is just a nickel a gallon when gas is $2.50. But it doubles when gas is closing in on $5 and becomes more significant. A few gas stations have responded by refusing to accept credit and debit cards.
Is buying Visa stock a way to profit from higher gas prices? To find out, let's put the stock through our four tests:
Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Normally, you would download the company's stock trading history as far back as you could. With years of trading history, it's possible to measure the stock's risk and reward.
But this analysis doesn't work with companies that haven't been public very long, as is the case with Visa. Not having this information forces us to rely much more heavily on the next three steps, which is always problematic, as you'll see shortly.
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