We are in the middle of another important equity earnings season. The reaction to these events in the stock market is always binary. Even if we know the exact numbers that the companies are going to report, we cannot foretell how the stock will move on the headline. For instance, we often see big drops on excellent earnings reports where management beats and raises. There was no better example than Caterpillar (NYSE:CAT) earlier this year when the stock collapsed (and took a whole sector with it) merely on one sentence from the company CFO.
From time to time, I do place bets on earnings if I see an opportunity. Last night, I bought some options calls in American Express (NYSE:AXP). Management delivered a nice beat and guidance was okay. So this morning I should have some greens in them which makes for a good start to this trade.
While my trade from last night was a completely binary one Vegas-style, I do believe in the company’s fortunes in the long run.
The payment transactors have been popular lately, and, for good reason, American Express and others are making good headway into the up-and-coming financial tech companies. There is excitement in the space with regards to blockchain.
But I am more interested in the overall electronic transaction aspect of their business. They are financial companies, however; thankfully they don’t trade like the money centers.
Companies like Bank of America (NYSE:BAC) and Citigroup (NYSE:C) cannot hold any rallies this year. Whereas the transactors are soaring. AXP lags the bunch only up 5% in 2018 but therein lies the opportunity as it’s catching up of late. My thesis here is that AXP is currently doing very well and is best set up for the continuation of growth both on the top and bottom lines. They are making the right alliances and long gone are the days of mistakes and like the one with Costco (NASDAQ:COST) account.
This is a strong company and a good management team who operates in an important space. We are now in an era where spending is moving online almost entirely and there is no turning back. Thanks to Amazon (NASDAQ:AMZN), almost all of shopping is now electronic and on the web. Retailers are playing catch up, so this is a trend that is likely to continue.
There’s room for companies like AXP, Square (NYSE:SQ), Visa (NYSE:V) and MasterCard (NYSE:MA) to all prosper. While AXP stock is not cheap relative to financials, it is one-third cheaper than V or MA. It sells at a trailing price-earnings ratio of 28. So owning shares from here is not likely to be a financial debacle for the long run.
Wall Street experts are mostly on “hold” for AXP and the stock is trading well below their average price targets. This almost eliminates the downside surprise headline from them. Technically, there is is risk below. If American Express stock falls below $101 per share it could invite momentum sellers to target $98. But it is now fading into a prior pivot zone.
Click to Enlarge These tend to act as support on the way down. They are not hard lines in the sand but rather rubber band support.
The bottom line is that AXP is a seasoned company that has overcome several challenges in the last few decades and I bet it continues to do so for the long-term. As long as the macroeconomic environment stays this healthy, I am optimistic about its future prospects.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.