If I had a nickel for every time I read the advice I should invest like Warren Buffett... I'd have a whole lot of nickels.
The Oracle of Omaha is revered for good reason: The stocks he picks tend to go up. And today's pick has been a Buffett favorite since 1964: credit card provider American Express (NYSE: AXP).
As the stock's outstanding performance shows, many of the stocks Buffett backs are likely to be good trades. Since its 2009 low, AXP is up nearly 900%, compared with roughly 200% for the S&P 500.
One aspect that surely attracted Buffett to the stock is the company's strong foothold in the credit card market, which is controlled by three major players. Visa (NYSE: V) has the largest share with roughly 45%. Next comes American Express with just over 25%, and then MasterCard (NYSE: MA) with just under 25%. The fourth player, Discover Financial Services (NYSE: DFS), lags far behind with just 5%.
While Visa and MasterCard cast a wide customer net, American Express differentiates itself by appealing to the affluent consumer. For the privilege of being able to target the upper class, merchants pay the company 3% sales commission, compared to 2% received by major competitors. Research shows AXP customers charge 53% of their personal spending to their card versus about 34% for other cardholders.
On many card products, American Express receives no interest. With its American Express Platinum card, for example, cardholders must pay their full balance within 30 days of the statement's receipt. The company makes up the lost interest in annual fees. The platinum card costs holders $450 a year, much higher than MasterCard's or Visa's premium entries.
With cardholder spending on the rise, combined with new initiatives to expand card acceptance domestically, internationally and with smaller merchants, the stock shows solid growth potential.
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The current chart is a picture of strength; however, that wasn't always the case. In 2007, just before the financial crisis, shares traded in the mid-$60s. By 2009, they hit a low under $10.
As the financial crisis waned, AXP recovered rapidly. By 2010, shares had recovered to nearly $50, where they plateaued, trading sideways in a fairly narrow range between $40 and $50 from early 2010 to late 2011.
After probing $40 support one last time in the fall of 2011, AXP rallied. By April 2012, it hit resistance at $60, not far below the 2007 peak.
Not surprisingly, the stock was unable to penetrate this important resistance level. For the remainder of the year, it traded sideways with support just over $50 and resistance just under $60.