Instead of going with a pricey growth stock that seemed primed for even more growth, I’m picking a value stock that is almost universally hated — American Express (AXP).
AmEx fell nearly 30% in 2015. The full-year numbers aren’t in for the company yet, but Wall Street is expecting that both sales and profits fell from 2014 levels.
Next year doesn’t look that much better. Analysts are forecasting EPS growth of just 3% and a revenue decline of 1%. AXP is losing some key customers in 2016. Costco (COST) and JetBlue (JBLU) are both ditching AmEx in favor of new credit card partners.
More rate hikes from the Federal Reserve could also strengthen the dollar further, which would put increased pressure on AmEx’s international operations.
That Said …
So why am I picking AXP, then? I think most of the bad news is now priced into the stock. Shares trade for just 12.5 times earnings estimates. That’s a huge discount to the valuations of rivals Visa (V) and MasterCard (MA).
AmEx is also somewhat of a tertiary bet on a comeback at Walmart (WMT) — which is no given. AmEx and Walmart are partners in Bluebird — an online checking account/prepaid debit card product. WMT had an even more gruesome year than AXP in 2015.
Still, even a small comeback in sales at Walmart in 2016 might be enough to lead to higher revenue for Bluebird. And remember, the bar is set pretty low for AXP stock right now. I’m not expecting American Express to suddenly start posting double-digit percentage gains in sales and profits. But it won’t take that to get Wall Street excited. AmEx merely has to stop the bleeding and show some growth.
But make no mistake. AmEx has to show signs of improvement this year. If not, there could be more pressure on the company to make a management change … which could be good for the stock.
One activist — Jeff Ubben of ValueAct — bought more than 11 million shares of AXP stock this year. Ubben, you might recall, is the activist that many credit for helping to bring out the end of the Steve Ballmer era at Microsoft (MSFT).
Will Ubben – or other activists for that matter – call for CEO Ken Chenault to step down if American Express can’t turn things around? Perhaps.
From an investing standpoint, Ubben lurking in the background is a positive. If Chenault rejuvenates AmEx, that’s obviously great news for investors. That’s what everyone wants.
But if AXP stock continues to stumble, then Chenault could be forced out and replaced by a new CEO that would likely get a lengthy honeymoon period from Wall Street.
Regardless of who’s at the helm at AmEx, there could also be calls for more shareholder-friendly asset sales. One payments expert, Karen Webster of Market Platform Dynamics, has suggested that the company could spin off everything but its lucrative corporate card business.
Another possible move? AXP goes on the prowl and buys a company with more digital payments prowess. PayPal (PYPL) would potentially be a good (albeit) pricey fit. So how about Stripe? AmEx is already partnering with the mobile payments startup…and has invested in it as well.
If nothing else, 2016 should not be a quiet year for AmEx. The company has to do something to prove to Wall Street that it’s not about to go extinct. This is the year to go big or go home.
That makes AmEx an admittedly risky bet. But it could be very rewarding.
Finally, I think it’s worth noting that AXP stock continues to be a favorite of Warren Buffett. Berkshire Hathaway (BRK.A, BRK.B) has not lost faith in AmEx despite its recent woes. That has to account for something. Betting against the Oracle of Omaha is usually not a great idea.
As of this writing, Paul R. La Monica did not hold a position in any of the aforementioned securities.
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