Thoughts on American Express and other card companies
While Amex was trading in the low $30s last year, Paul Larson, who runs the Stockinvestor portfolios at Morningstar, said that this stock could triple within the next two years ... or get cut in half. Amex faces increasing consumer credit losses and it also misstepped by going outside its core competency of high-income customers. Morningstar rated the stock as a low-uncertainty one in early 2008, which turns out to have been mistaken.
However, their brand equity is very strong. Their business model is still spend-centric, not lend-centric - as opposed to Discover, the other big closed loop card company. Discover's underwriting has proven stronger, but with the economy recovering, credit losses all around should decline and consumer spending should grow, particularly among the big spenders.
Right now, with the stock trading over $42, the risk-reward profile has declined substantially. I would not buy the stock at today's price. Bruce Berkowitz of the Fairholme fund sold out at an average of $24 after buying the stock at an average of about $14; Berkowitz has bought none of the other big financial companies and his fund's only financials investment is a deep-value play on Americredit. Most of the other top investors who hold Amex have been holding tight and I'm doing the same. Thanks to my dollar-cost averaging, I'm actually down only 2% or so, despite having started buying in the high $50s.