Investors don’t like it when a company has a legal problem hanging over it. That’s because the court system can take time, and considerable amounts of money, to fend off a legal battle.
Resolving a legal issue can lead to a rally in the short-term, even if there are big costs involved. That’s because taking the uncertainty off the table is good for shares looking forward over the long term.
Discover Financial Services (DFS) just reported that they had to address shortcomings in their compliance-management systems.
However, the company won’t have to pay any regulatory fines to do so. That takes a big uncertainty off the table – and at a very low cost.
With shares trading at less than 7 times earnings, Discover is the cheapest of the big credit card network companies.
It doesn’t have the biggest network or strongest brand. But at current prices, it looks like a reasonable valuation for investors now.
Action to take: Investors may like shares here as a short-to-medium-term market rebound play. At current prices, shares yield about 3 percent.
For traders, shares are bouncing off 52-week lows on the latest news. The rally looks likely to continue. The January $100 calls, last going for about $3.35, could see mid-to-high double-digit gains in the coming weeks.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.