While investors in American Express (NYSE:AXP) are likely interested in the company’s exact earnings data for guidance on its stock, even more useful is parsing the company’s numbers for what they say about the economy at large. Credit card stocks like Amex, Visa (NYSE:V) and Mastercard (NYSE:MA) can provide crucial information about consumer behavior, which in turn can signal you to make portfolio adjustments before it’s too late.
Here are some important numbers from Amex’s recent earnings report. The key metric is that average consumer spending per card increased by 8%. For Amex’s demographic, which tends to be wealthier than holders of other cards, that means folks in the higher-income brackets were comfortable spending their money again following the financial crisis. This jibes with results from Tiffany (NYSE:TIF), which has seen its high-end merchandise move to the tune of double-digit revenue growth for the past several quarters.
Travel sales increased by 5%, so that’s yet another tip that the leisure sector may be worth looking at, particularly hotels and hotel REITs. My favorite in this sector happens to be Ashford Hospitality Trust (NYSE:AHT).
Business sales grew very strongly, by 11% in Q4 and 13% for the year. So, companies are loosening their purse strings, allowing those employee charge accounts to gain traction. That bodes well for the economy across the board. But look closer, and you’ll see that North America and Latin America business were up 13% for Q4, but Europe was only up 4%, and Italy actually declined. Things are not good in Europe, which is why I still think you should short the euro, among other things.
American Express’s loan delinquencies also shrank to 1.4% from 2.1%, suggesting that not only are people spending more, they’re also paying off the charge cards more diligently. It’s also an Amex historic low, and the lowest in the industry. So it shows Amex is being very careful in its underwriting, which is another good reason to consider buying the stock.
Combine this with the fact that loan balances grew 3% year-over-year, but at a much slower rate than the growth rate of spending on lending products. It tells us that consumers aren’t crazy about taking on credit card debt. They’ll spend, but they won’t leverage. That’s a good sign for the overall health of the economy because it means folks aren’t releveraging, which is what got us into the mess in the first place.
What does this data suggest, and how else can you take advantage of it? If this upper-tier demographic is spending in this manner, I think buying into higher-end retailers like Nordstrom (NYSE:JWN) and Saks (NYSE:SKS) — both of which beat analysts’ estimates — is a good move. You can also jump into a high-end consumer discretionary ETF, such as Claymore/Robb Report Global Luxury ETF (NYSE:ROB). Look at hotels, but also at travel and leisure ETFs, such as PowerShares Dynamic Leisure and Entertainment Intellidex Portfolio (NYSE:PEJ).
And be sure to read over Visa and Mastercard’s earnings reports when they come out for more clues as to what to buy or sell in the broad market.
Lawrence Meyers holds shares of Ashford Hospitality Trust.
