The payment sector has been the darling of Wall Street the last few years, and it continues to be an active space with several mega-mergers. Only four months into 2019, the payment sector already reached US$85 billion of merger and acquisition announcements – almost doubling the full-year record of US$49 billion in 2018.1 I expect the trend to continue.
The Invesco Canada Small Cap Equity team, which manages funds in the U.S. and Canada, has been participating in this trend through our investment in Global Payments, a Top Five holding in Invesco U.S. Small Companies Class Series A (5.65% of fund assets as at March 31, 2019).
Global Payments enables merchants to accept card and digital payments, and the company earns a small fee for processing the transaction. We started investing in the company in August 2013 at around $24 a share.2 At the time, the investment community was concerned about a data breach at Global Payments, as well as the risk that companies such as Square could lessen the need for payment intermediaries (Square is not a fund holding as at March 31, 2019). On top of that, the U.S. economy was slowing, and there was a federal government shutdown and a sharp drop in job growth (sound familiar?).
A case for patience
Despite these concerns, we believe that consumers’ switch from cash payments to card payments is an enduring shift, and Global Payments has scale as one of the leading providers in U.S., U.K., Canada and several Asian countries. We bought the stock at a very attractive valuation of 12x forward earnings. As at March 31, 2019, Global Payments was trading at $136.
Yet, having the tenacity and patience to hold onto any stock is challenging, even when the underlying story is solid. Every day for the past six years of owning Global Payments, there has been a long list of perfectly rational and well-supported reasons to sell:
- Long-term industry worries such as intense competition and innovative disrupters like Square and Apple Pay
- Macro fears such as interest rate increases and poor consumer spending
- Short-term headwinds such as foreign exchange and tough comps
- To add to the mix, the biggest equalizer of all – valuation
A long-term view
So how do we get the required fortitude to stay the course? We dig deep and we think long-term.
We study the business from multiple angles, including through direct access to management and competitors. Back in 2013, our team spent half a day at the Global Payments head office with the then-CEO, CFO and the President of the U.S. division (who is the current CEO). We debated barriers to entry, dissected previous acquisitions, and examined their new strategy for a software-driven integrated payment solution. We talked to service resellers and end customers. As recently as last fall, we spent time with their Chief Product Officer, who has rich experience from Google Pay and Qualcomm (neither of which are fund holdings as at March 31, 2019) but rarely meets with investors.
Coming out of these meetings, we believed in the broader credit card/digital payment penetration and management’s ability to partake in the strong industry growth. (On the other hand, part of our thesis on international expansion in China and India did not materialize.) It takes years, not quarters, to realize these long-term trends.
Our focus on long-term returns, and our concentrated portfolio of 25 to 35 holdings, helps us filter out the noise. In our opinion, perseverance is key to investment success.