Market Insights

As a new year gets underway, a new group is leading the market higher: financial technology, or “Fintech,” companies.

Stocks like Square (SQ) and PayPal (PYPL) not only stand at the crossroads of the new digital economy. They’ve also outperformed the S&P 500 and Nasdaq-100 by a wide margin so far in 2020. Two Latin American firms, MercadoLibre (MELI) and StoneCo (STNE) make the list as well.

That kind of strong price action is a classic sign of investor rotation, a process of large institutions shifting capital into certain industries. The fact it’s happening early in the year is another sign of accumulation by new buyers.

SQ, the most heavily traded of the group, is also up the most since December. In case you missed it, here are some bullish headlines recently amassed by Jack Dorsey’s company:

• Bank of America upgrades to buy at the same time SQ introduces new fees for instant money transfers. (1/7)
• Stephens raises to overweight. (1/10)
• Berenberg hikes its price target from $58 to $67. (1/22)
• Credit Suisse initiates with a buy rating and $84 price target. (1/24)
• Macquarie predicts SQ’s Cash app users would accept a 50 percent increase in their fees. (1/28)

Cup and Handle Chart Patterns

SQ also has a “cup and handle” chart pattern. Popularized by William O’Neill’s classic book How to Make Money in Stocks, cups and handles are common for companies with long-term growth stories.

Investors stream into a stock for quarter after quarter. It then pauses and consolidates in a high basin shape. O’Neill tried to reenter as they move out of the pattern, looking for new highs.

SQ rose almost 900 percent between May 2016 and September 2018, exactly the kind of rally you’d expect from a hyper-growth company. It then gave up half the gain and chopped sideways for more than a year.

PYPL is also rebounding from a big pullback in late 2019. Investors shrugged off weak guidance last week, buying an initial drop on the news. Optimism like that is another sign of investor accumulation.

Latin Fintechs

MELI and STNE are lesser known companies with similar businesses and similar charts. MELI is mostly known as an e-commerce firm — something of a cross between Google and Amazon.com. But the Argentine company is also becoming a financial-service provider by providing loans and financing to millions of small businesses in Latin America.

STNE is a Brazilian credit-card processor with backing from bigger firms like Berkshire Hathaway (BRK.B) and Alibaba’s (BABA)’s Ant Financial.

Traders may want to watch these companies because they all have cup and handle patterns. MELI broke out today, while the other three are still below their old highs.

Other less-glamorous fintech stocks have already broken out:

• Fidelity National Information (FIS): A provider of payment processing services.
• Firserv (FISV): A software company serving banks.
• Global Payments (GPN): A payment processor for merchants.

In conclusion, big credit card companies like Mastercard (MA) and Visa (V) have been some of the top growth stocks over the last decade. Smaller companies have jumped into the space as the world’s economy embraces electronic payments. After a period of rest, some of those prominent names are now showing signs of coming back to life.