We can say with almost certainty that, at some point, S&P 500 will gain momentum and surpass its previous record high set on Jan 3, 2022. While the US economy is currently in a tightening cycle as the Federal Reserve kept interest rates at the highest level they have been in more than two decades it appears investors have their eyes on the horizon; The S&P 500 is up more than 14% this year as the market begins to gear up for a possible economic reopening.
At some point, the Fed will no longer raise rates. What’s more, interest rates will eventually start to come down. Once it becomes clear that inflation has been contained and the Federal Reserve eases its tight tightening, the US economy may rebound and stocks may rise. But investors don’t want to wait for good news to hit the market. Instead, they should consider owning the stock before we are in the clear. After all, since the market is future-oriented, investors will likely start valuing before the economic boom. Investors who stay on the sidelines risk losing potentially significant gains.
But really, what is a good way to profit from a potential economic boom? One idea is one of Warren Buffett’s biggest and longest-standing stock holdings: American Express (AXP -0.07%). Warren Buffett’s holding company, Berkshire Hathaway(BRK.B 0.58%) (BRK.A 0.52%) holds a stake in the company worth approximately $24 billion, or more than 20% of the integrated payments company’s outstanding shares. That’s why investors may want to follow Buffett’s lead and invest in this wealth compounder.
Multiple Powerful Growth Drivers
A closer look at American Express, one of the leading credit card brands in the US, reveals that there is a lot to like.
Firstly, the company has a premium customer base; The average customer spend per American Express card is three times the average spend on cards on other networks. This premium customer is likely more resilient than the average low-spending customers attracted by other networks, which positions the company well for both continued macroeconomic uncertainty or an economic boom.
In addition, American Express also dominates the small business segment, boasting three times as many business cards as the next largest competitor. Similarly, the company claims a 45% share of US small business card payment volume.
Furthermore, on the contrary Visa And master cardAmerican Express is not only the payment processor for its cards, but also the lender. This integrated model gives American Express an efficiency advantage because it controls the entire value chain behind each credit card.
Lastly, the company boasts a conservative balance sheet. It is management’s practice to maintain a common equity Tier 1 ratio of 10% to 11%, which is well above the regulatory minimum of 7% and likely higher than any updated regulations require.
We also haven’t expanded on some of the other unique factors of American Express’s business, including its high customer retention levels or its fee-based membership model.
All of these aspects of American Express’ business combine to make the company an attractive bet on a proven and resilient business that has been fueled by the expansion of upper-income households, the rising spending of many of the world’s wealthiest people, the global adoption of gets benefitted. Credit cards, and expected market share growth with the younger generation.
Growth stocks without growth valuations
“That all sounds great. But show me evolution,” some readers may be thinking.
Luckily, this is actually the easy part. Despite incredibly difficult year-over-year comparisons, American Express’ revenue grew 12% year-over-year in the company’s most recent quarter; Revenue grew 31% year over year in the year-ago period.
Given the company’s improved appeal to younger customers, rising spending from existing customers, steadily rising annual membership fees on its cards, and global expansion, management confidently reiterated its aggressive long-term growth aspirations in its second-quarter earnings call. The company expects revenue growth to exceed 10% annually through 2024 and beyond, and an earnings-per-share growth rate in the mid-teens.
Given the company’s long history of success and American Express’ outstanding performance in recent years, investors will want to take the company’s growth aspirations seriously. With a price-to-earnings ratio of just 16 at the time of this writing, the market’s fragile sentiment regarding the economy and the financial sector, in general, is causing investors to lose sight of the bigger picture — with regards to American Express in particular. In.’ share.
This growth stock deserves a very high valuation. While there’s no way of knowing exactly where the stock’s bottom is this month, investors who buy shares today won’t regret it five years from now.
American Express is an advertising partner of The Motley Fool Company, The Ascent. Daniel Sparks holds positions in American Express and Berkshire Hathaway. His clients hold shares of American Express and Berkshire Hathaway. The Motley Fool has positions in Berkshire Hathaway, MasterCard and Visa and recommends it. The Motley Fool recommends the following options: long Jan 2025 $370 calls on MasterCard and short Jan 2025 $380 calls on MasterCard. The Motley Fool has a disclosure policy.
Source: www.fool.com
