Motley Fool: Discover Financial Services offers potential

Discover Financial Services (NYSE: DFS) is one of the largest credit card issuers in the country and has used its strong market position in credit cards to expand into other product groups such as student loans and personal loans. It has been pleasing shareholders lately, with its last quarter featuring a double-digit increase in earnings per share and net interest income, along with solid loan growth.

The financial firm offers traditional banking services and also operates PULSE, a leading ATM/debit network, and Discover Network, a secure payments network facilitating payments for credit, debit and prepaid cards. Its high reliance on the credit card business positions it to capitalize on higher consumer spending in an economic upswing in the U.S.

Discover also has a growing presence in China, in part via a partnership with China’s UnionPay, whose debit card is now the most widely used card product in the world.

Discover Financial’s fans like its brand strength, disciplined lending culture, customer loyalty and diverse operations, along with its management team’s long-term track record of success. With a price-to-earnings (P/E) ratio near 12, the company also compares favorably to other credit card-focused financial firms from a valuation point of view. Its dividend recently yielded 1.5 percent, and its payout has quadrupled over the past three years. (The Motley Fool owns shares of Discover Financial Services.)

Ask the Fool

Q: How low is our current inflation rate these days, and how high is it elsewhere in the world? – G.K., Cincinnati

A: The overall U.S. annual inflation rate was recently about 2.1 percent, well below the long-term average of 3.3 percent.

As of June, the inflation rate was 0.5 percent in France, 1 percent in Germany, 1.9 percent in Great Britain, 2.4 percent in China, 3.6 percent in Japan, 6.5 percent in Brazil, 7 percent in India, 7.8 percent in Russia and 9.2 percent in Turkey. Greece was experiencing deflation, with a June inflation rate of negative 1.5 percent.

Some nations have been experiencing inflation rates closer to hyperinflation levels. Venezuela, for example, topped 50 percent recently; Iran’s rate is close to 20 percent; and while Argentina’s official rate is near 11 percent, some think it might be as high as 25 percent. Steep inflation, with prices surging, is destructive to economies.

Q: To learn about investing in stocks, what subjects should I study? – W.M., Daytona Beach, Florida

A: To be a good investor, it’s helpful to have a solid understanding of financial accounting so that you can get much more from reading companies’ financial statements.

You can learn a lot from books such as “How to Read a Financial Report” by John Tracy and Tage Tracy (Wiley, $23) or “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson (Career Press, $18). Read these valuable investing classics, too: Peter Lynch’s “One Up on Wall Street” (Simon & Schuster, $17) and Philip Fisher’s “Common Stocks and Uncommon Profits” (Wiley, $23).

My dumbest investment

I’ve made many investment mistakes. I rode Nokia all the way up and down (except for some shares I donated to my church pretty close to the top). I’ve sold others way too early. I beat myself up more about missing a stock’s top than I do about missing the bottom, while most investors may agree that the tops are way harder to predict. – Adam H., Macon, Georgia

The Fool responds: It’s not worth beating yourself up at all, since no one can consistently and correctly predict when a stock will hit a high or low. You should expect to have imperfect timing, but you can still build wealth that way. You needn’t buy at a stock’s bottom. Just find strong, growing companies that seem to be undervalued, and aim to hang on for the long haul as they meet and eventually surpass their current intrinsic value.

Think twice about selling a stock when it’s reaching new highs, too, unless it seems significantly overvalued. The company may simply be performing very well and growing briskly.

Kudos for donating appreciated stock to charity – that’s a very tax-smart move.