Synchrony Financial, split off from GE, is trading at a discount to entice investors Patrick T. Fallon/BloombergSynchrony Financial processes payments for many store-branded credit cards, including those issued by J.C. Penney, Amazon.com and Walmart.As you get ready for holiday shopping, you may be looking forward to the nice discounts and cash-back plans retailers like Amazon.com and TJX offer with their store-branded credit cards. They’re very popular with consumers. But this week, the shares of the credit card company behind those popular private-label cards are themselves trading at a steep discount. Better yet, it’s a discount you can almost count on to go away soon. The bottom line: Now is a good time to take advantage of the sale and get exposure to this company, called Synchrony Financial SYF, -0.45% In addition to the temporary stock discount, the company also has good medium-term prospects — as the biggest player in the relatively high-growth private-label card industry. To profit from the discount, you can buy Synchrony’s stock outright. But here’s a better approach: Buy shares of General Electric Co. GE, -1.66% with some provisos I’ll get to in a second. First, why the discount in Synchrony Financial shares? And why might the discount will go away over the next few weeks? Two main reasons. Let’s dig in.The splitsville discount Synchrony Financial is being split out of General Electric. This is the last big gasp by GE as it jettisons consumer-finance units to get back to its industrial roots. The deal is huge. GE already split off 15% of Synchrony stock in a 2014 initial public offering. Now it is getting rid of the other 85%. That’s about $21 billion worth of stock. It’s so much, GE has to offer a discount on Synchrony shares to encourage enough GE shareholders to take the share swap. We won’t know exactly how many Synchrony Financial shares investors get for a share of GE until some time Thursday. But it will probably be around 1.07. This implies about an 8% discount on Synchrony stock if you buy GE shares now and tell your broker you want delivery on Synchrony shares. (You’ll most likely have to get all this done by the end of trading, Nov. 16, but check with your broker to be sure.)An arbitrageur’s playground Next, Wall Street being Wall Street, arbitrageurs are circling this deal to pocket the discount. To do so, they have to buy GE shares and short — or sell — Synchrony stock to lock in the discount. Their selling, and anticipation of it by other investors, puts pressure on Synchrony stock. It has fallen 6%-9% in the past few trading days. This is typical of this type of deal. But so is what’s likely to happen after the close of the exchange deal on Nov. 16. Barclays Capital analyst Mark DeVries recently dug into the history of how these split-offs play out and here’s what he found: In the 15 split-offs since 1995, the shares of the split-off company rise an average of 2.3% in the week after the exchange offer is closed. That’s not just luck. The excess return over market gains was 2.2%. Split-off companies beat the market 60% of the time. Synchrony Financial’s shares may get an extra boost because they are being added to the benchmark S&P 500 Index after the close of trading on Nov. 17.More than a trade Of course, there’s no guarantee that Synchrony will rise after the exchange offer closes. Who knows? The market might tank. And, anyway, short-term trading can be a tough way to make a buck. That’s why I think it’s better to buy Synchrony at a discount now as a medium-term play for the next few years. Jefferies Equity Research analyst John Hecht has a $42 one-year price target on the stock. Here are three reasons why Synchrony looks like a good medium-term hold. Reason 1: Synchrony has promising growth potential As the biggest player in the private-label credit card space, and the purest play to boot, Synchrony stands to benefit from the growing popularity of these cards. Why are they such a hit? Shoppers like these cards for the perks. Cards offered by Amazon.comAMZN, -1.14% and TJX Cos. TJX, -1.20% provide 5% cash back or 5% discounts. Shoppers who have the J. Crew co-branded card get free tailoring. Merchants like these cards because they boost sales and customer loyalty, says Michael Mattioli, who covers the financial sector for John Hancock Asset Management. Merchants also avoid the fees they have to pay when customers use cards from Visa Inc. V, -1.10% MasterCard Inc. MA, -2.58% or American Express Co. AXP, -1.28% That’s because Synchrony has its own payment-processing network. And merchants actually enjoy a cash payback on the savings, for a double win. Last year, Synchrony paid out $2.6 billion to retailers, says Morningstar analyst Dan Werner. Because both merchants and shoppers like private-label cards so much, Synchrony will benefit as these cards continue to take share from regular cards offered by Visa and MasterCard, says Mattioli. The key here isn’t necessarily how much consumers purchase, but the outstanding balances they carry, because those produce nice interest payments for Synchrony. Last year, those balances grew by 8% for private-label cards, compared with 4% for standard credit cards, says Mattioli. Since 2010, the private-label card market has grown 4% a year, compared with 1% for regular credit cards, says Hecht, the Jefferies analyst. “Synchrony Financial is the market leader in an industry with favorable secular growth trends,” he says. Synchrony also helps retailers provide financing on big-ticket items like furniture. And it offers financing to help people pay for medical procedures. But cards account for over two-thirds of its business. Reason 2: Synchrony will get a boost from the economy Though many people still have doubts about the economy, it continues to grow at a reasonably solid 2.5% rate. Employment growth continues, and wages have begun to perk up because of tightness in the labor market. Consumer balance sheets are fairly solid overall. And consumers feel richer because home values continue to go up. All of those trends will encourage consumers to use credit cards more, and increase the number of people who qualify for cards. Reason 3: Share buybacks and dividends are on the way Synchrony is strongly capitalized. With Federal Reserve approval, it should start paying dividends and doing share buybacks. This will probably begin next year.Help for GE By the way, in case you’re wondering, all of this should help General Electric, too, in the medium term. Near term, maybe not so much. GE’s stock could weaken after Nov. 16, as the arbitrageurs who are bidding up GE as part of their gambit back away. But after that, a few benefits kick in for GE. First, the split-off simplifies GE’s business. After the split, about 90% of GE’s earnings will come from its industrial businesses. The rest will come from financing activity supporting those businesses. The split-off also will give GE about $20 billion in cash for share buybacks. That will translate into the purchase of 650 million to 750 million shares, GE Capital CEO Keith Sherin said in the company’s most recent conference call. For more on why I like General Electric, click here.What could go wrong? Of course, there are no sure bets in the stock market. Here are two risks for Synchrony Financial: If the economy tanks, all bets are off for credit card companies. Another risk is technology. Over the next few years, consumers will be using their phones a lot more to pay for stuff straight from their bank accounts. This could be a real problem for credit card companies. Synchrony is already fighting back, though, by building its presence on mobile devices. The best example is the company’s deal to be part of Apple Pay, the mobile-payment system offered by Apple Inc. AAPL, -0.49% At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested GE in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist group, and he attended Columbia Business School in the Knight-Bagehot program. More from MarketWatch