Occasionally I get new insights while listening to audiobooks on morning runs. I was recently listening to Chapter 6 of Tony Robbin's "Master the Money Game,"entitledāInvest like the .001%," in which he describes meetings with renowned financial geniuses. The interview with Paul Tudor Jones (Trades, Portfolio) intrigued me so much that I was compelled to stop mid-run and relisten to the interview. The biggest takeaway I got from their conversion as outlined in the audiobook was that Jones adopts the 200-day moving average of various asset classes to time when he gets in and out of the market.
Jones' trading strategy versus those of value investors
Jones, hedge fund manager and founder of Tudor Investment Group, is a macro trader who relies primarily on technical analysis for his investment success. As a macro trader, he looks at asset classes rather than individual stocks. His claim to fame is his accurate prediction of the 1987 crash, in which he was able to profit by an estimated $100 million. He states he comes from a time in which fundamental metrics were not readily available, so he learned to be a āSlave to the Tape.ā According to Jones:
"The inability to read a tape and spot trends is also why so many in the relative value space who rely solely on fundamentals have been annihilated in the past decade. Markets have consistently experienced ā100-year events' every five yearsā¦"
This philosophy is different from those used by most value investors who typically evaluate trades on a combination of fundamentals and intrinsic business values. But Jones echoes the same sentiments as Warren Buffett (Trades, Portfolio) when it comes to rule number one and rule number two. Both gurus make great efforts to preserve capital. Jones implies a technique of asymmetrical risk analysis (also known as a 5:1 return to risk ratio) and uses a multitude of approaches to do this, including fundamental analysis, technical analysis, macro asset analysis, investor sentiment and others. Another principle he adheres to is humility. He said, "Don't be a hero. Don't have an ego. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead.ā
The 200-DMA rule is a risk-averse strategy that protects an investor's portfolio by assessing market trends, so even if a stock looks like a good value on many levels, the philosophy ultimately defers to the market as the factor on whether an investor should execute a trade. As quoted by Jones in Robbins' book:
"I've seen too many things go to zero, stocks and commodities. The whole trick in investing is: 'How do I keep from losing everything?' If you use the 200-day moving average rule, then you get out. You play defense, and you get out."
Although Jones primarily uses his 200-DMA rule for macro environments, it can also be applied to individual equities. For this discussion, the financial sector is selected based on its lower CAPE ratio relative to those of other sectors, and PayPal Holdings Inc. (PYPL, Financial) is selected to evaluate as it is an equity in the financial services sector that provides an interesting illustration of this principle.
The lure of PayPal
From a fundamental standpoint, PayPal currently looks bright with a GF Score of 98, a profitability rank of 10 out of 10, a financial strength score of 7 out of 10 and a GF value rank of 8 out of 10. As of May 25, GuruFocus values the stock at $97.24, significantly above its current share price of $61.64. The company has respectable return on invested capital and debt-to-equity ratios at 20.64% and 47%. In all respects, this looks like a great bargain.
Moreover, PayPal is garnering positive reviews from the press and analysts who are optimistic about its first-quarter performance.
However, looking at the 200-DMAs for the timeframes of one day, three months and one year gives a different picture. In all cases, PayPal shares are above the 200-DMA line, but the line is trending downward. Thus, an investor who is holding a position in this stock is encouraged to keep holding it, but an investor who is watching the stock may want to hold off purchasing a position until the 200-DMA begins to trend upward.
Recent fundamentals and analyst praises are likely due to a complete change in the executive team since Alex Chriss replaced Dan Schulman as CEO in September 2023 as well as PayPal's positive results for the latest quarter after a long history of flat or negative returns dating back to 2015.
Contrast this with Capital One Financial (COF, Financial), which, despite some weaker fundamentals and analyst consensus, displays a 200-DMA with a year-to-date upward trend line.
| Fundamental Comparisons* | PayPal (PYPL, Financial) | Capital One Financial (COF, Financial) |
| Analyst Consensus | Buy | Hold |
| Profitability Ratios | ||
| Gross Margin % | 45.51 | N/A* |
| Operating Margin % | 16.96 | N/A* |
| Net Margin % | 14.26 | 13.97 |
| FCF Margin % | 16.38 | 52.62 |
| ROE % | 21.48 | 9.34 |
| ROA % | 5.51 | 1.1 |
| ROIC % | 18.99 | N/A* |
| Capital Allocation Ratios | ||
| ROCE % | 17.71 | N/A* |
| Debt-to-Equity | 0.47 | 0.86 |
| Interest Coverage | 14.92 | N/A* |
| WACC% | 11.95 | 16.45 |
| WACC/ROIC | 0.63 | N/A* |
*Fundamentals (GM, OM, ROIC, ROCE, Interest Coverage) are not comparable between the two companies as PayPal is a payment processing company whereas Capital One Financial is a banking operation.
The case for watch-listing PayPal
During the first-quarter earnings call, Chriss forecasted a promising future for PayPal, but cautioned that although the results were encouraging, the company is still in the early stages of transformation. There are considerable headwinds and challenges for PayPal.
The company benefits from a first-mover advantage in the payment processing space and has strong brand recognition. Venmo has achieved strong brand recognition among gen Zers, but PayPal still faces hurdles to monetizing the brand effectively.
The payment processing industry is still going through a market correction from pandemic highs and acceptance growth has stagnated. Despite the positive first quarter, a Morgan Stanley research report noted the company had the worst churn rate that they had tracked since 2019.
The new management is looking to make several prudent decisions concerning divesting the company of unprofitable acquisitions and implementing enhancements to keep its products competitive. They are still evaluating the viability of Xoom, an online money transfer service for international payments purchased in 2015, which has been reported to have questionable alignment with PayPal's core business.
Moreover, expanding globally may prove challenging as many governments favor local players impeding PayPal's market penetration in those areas. The industry also has very low barriers to entry and online and point-of-sale transactions are starting to merge, exposing PayPal to a sea of larger competitors.
The company's new non-GAAP reporting policy may dissuade investors as PayPal started including stock-based compensation expense, which will make headline earnings figures more comparable to peers, but will also make the stock appear more expensive concerning earnings ratios.
CFPB headwinds
The Consumer Financial Protection Bureau, a regulatory agency that was authorized by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, has introduced legislation that may present considerable hurdles to PayPal's upward profitability trajectory.
In 2022, the agency launched the Office of Competition and Innovation to level the playing field between large payment processing companies like PayPal and smaller competitors, lowering marketplace entry barriers and narrowing its competitive advantage versus those of other players.
In November, the CFPB proposed a new ruling for digital payment competitors with over 5 million transactions, subjecting them to the same supervision and oversight under section 1024 of the Dodd-Frank Act as is currently applied to large banks and credit unions.
Most recently, the CFPB has announced an āinterpretive rulingā that buy now pay later companies (PayPal included) must comply with U.S. credit card laws.
These rulings open PayPal up to a wide range of outcomes regarding performance. Upon recent developments, Jones himself has just initiated a stake in PayPal, so interested investors should stay tuned!
Conclusion
In summary, Jones' reliance on the 200-day moving average serves as a powerful risk management tool. By following this rule, he navigates the markets with precision, avoiding pitfalls and capitalizing on opportunities. PayPal's new management team and recent performance look promising, but there are several hurdles facing its performance trajectory, including reassessment of the value propositions of various platforms, investor perception of the company's altered accounting practices, possible barriers to global expansion and new regulatory rulings targeted toward mid-to-large organizations in the payment processing industry.
Chriss cautioned investors that 2024 will be PayPal's year of transition. Still, with its well-established position in the payment processing industry and opportunities among platforms like Venmo and Zettle, investors may want to closely monitor share performance to determine when to start buying the stock.
Please note that I am not a financial advisor, and this article is intended only for informative purposes and should not be construed as investment advice.
