American Express Company (AXP) has been getting bruised this year, thanks in large part to a high-profile breakup with Costco (COST) over the end of its in-store partnership. But while shares of AXP stock are down more than 13% year-to-date, there have been signs of life lately as American Express gets up off the mat.
Specifically, shares jumped more than 6% in a single day after the hedge fund ValueAct Capital Management took a big stake in AXP stock.
This kind of move is exactly what American Express investors needed to see, both because of the short-term pop and because of what a big-time investment like that says about the shifting sentiment on AXP.
So if you’re looking for a bottom in American Express, we may have seen one last week — and now is the time to buy.
For starters, let’s keep in mind that American Express is not some slouch of a company. It has the highest customer satisfaction among credit card companies, with huge brand recognition worldwide. AXP stock also pays a 1.4% dividend. While not grand, it is immensely sustainable at just 20% of next year’s earnings.
Also, remember American Express remains one of the favorite holdings of Warren Buffett and Berkshire Hathaway (BRK.A, BRK.B). With some $12 billion worth of AXP stock, the position is among the top four in total value for Berkshire. That means some built-in stability here.
Longer-term, there are admittedly risks in addition to the Costco fallout, such as the rise of mobile payments and the overall disruption of banking. AXP stock, however, continues forging ahead with plans such as a partnership with Apple (AAPL) and Apple Pay, as well as a broad overall plan to outlive plastic.
The top line is challenged in the short term, but AXP still is quite profitable and recently recorded a beat on the bottom line. American Express has staying power, and investors could do worse than rely on this major name at a time when the rest of the market seems to be overvalued and everyone is waiting for the other shoe to drop.
I think the long-term potential of AXP stock is clear, and that’s why ValueAct wants in.
And at a forward price-to-earnings of about 14 (even after that initial pop), American Express could still be a bargain buy for long-term investors.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
