Wolfe downgrades credit card stocks to underweight, as research firm feels a 'recession is likely'

Published Thu, May 12 20228:24 AM EDTUpdated Thu, May 12 20221:32 PM EDT

Investors should sell shares of credit card issuers given that a "recession is likely," according to Wolfe Research. Analyst Bill Carcache downgraded credit card issuers as a group to underweight from market weight, saying in a Thursday note that the stocks will increasingly come under pressure with higher recession risks. "While we remain cautious on the low-end consumer (see our March downgrade), we now believe Credit Card Issuers with greater exposure to prime and super-prime credits are also likely to come under further pressure amid the growing probability of recession and downgrade the group to Market Underweight," Carcache said. "We now model an 80% probability of recession by 2024," Carcache said. The "recession downside Is not priced in." Shares of American Express and Discover were downgraded to peer perform from outperform. Shares of Capital One and Synchrony Financial were downgraded to underperform from peer perform. Shares of Bread Financial Holdings remained at peer perform. Wolfe Research trimmed price targets for all of the credit card stocks in its coverage. American Express' price target dropped to $146 from $213, or a 31% drop. Capital One's dropped to $86 from $131, a 34% cut. Discover's was cut to $97 from $136, a 28% drop. Synchrony's fell to $22 from $38. Bread's fell to $49 from $60. The analyst believed fears of a recession have yet to be priced into the stock. The return on average tangible common shareholders' equity (ROTCE), a measure of business performance, will likely get cut in half during a mild recession, while the cost of equity climbs higher. "Stocks that cannot cover their cost of equity deserve to trade below TBV [tangible book value], even in a mild recession. Shares today still trade 23-59% above their TBV," Carcache wrote. Shares of American Express dropped 1.5% in Thursday premarket trading. Capital One's stock price dropped 2.5%, Discover's dropped 1.9% and Synchrony's dropped 2.9%. Only Bread's stock price was unchanged. — CNBC's Michael Bloom contributed to this report.

American Express

Investors should sell shares of credit card issuers given that a "recession is likely," according to Wolfe Research.