Berkshire Hathaway has long been operated at the direction of Warren Buffett, who many consider to be the greatest investor ever. The legendary capital allocator is known for his sharp analytical skills and business acumen, which have helped the conglomerate amass an unbelievable track record compounding capital.
For the average investor, it makes sense to look at the stocks Berkshire owns. There's one business in particular that makes up 21.6% of the entire $281 billion portfolio and currently stands as Berkshire's second-largest holding. This company clearly has some wonderful qualities that caught the Oracle of Omaha's attention.
But is it a no-brainer buying opportunity right now?
Image source: The Motley Fool.
Buffett's vote of confidence
Berkshire has a massive stake in financial services giant American Express (AXP 2.98%), a position that's only smaller than Apple. Buffett's investment philosophy focuses on owning businesses that possesses an economic moat. It's clear that Amex fits the bill here.
The company has incredible brand strength, thanks to its premium position in the credit card space. Amex targets affluent customers with its Platinum and Gold cards, perhaps its two most popular offerings, that charge high annual fees and that provide unrivaled perks and benefits. These credit cards carry a certain type of cachet and are often seen as a status symbol.
Amex has been around for almost two decades, so the brand certainly has durability. It's been relevant for such a long time that investors should have confidence that the business isn't falling by the wayside anytime soon.
Another clear competitive advantage Amex has is a network effect. Besides issuing its own credit cards and taking on credit risk, the company also operates the underlying payment platform, similarly to Visa or Mastercard. Consequently, Amex's network gets stronger and more valuable to stakeholders as it expands and adds more merchants and cardholders.
Berkshire hasn't touched its Amex position in over a decade. That's an obvious indication of Buffett's conviction in the business, which he appears to have no intention of selling.
Can American Express stock beat the market?
American Express has historically posted steady financial growth. In the past five years, revenue increased by 65%, driven by a 30% gain in active cards and 39% growth in payment volume. An expanding economy spurs spending activity. Plus, Amex benefits from decreasing cash usage. These trends should continue in the years ahead.
Investors looking to copy Buffett and buy the stock might want to consider if it can outperform the S&P 500 index over the next five years. This is a valuable screen to utilize before considering a purchase. If you don't believe outperformance is in the cards, then it's best to just own the index.
In the past five years, Amex has generated a total return of 213%, which easily outpaces the broader S&P 500's 108% total return. That monster gain might not repeat itself in the future, though.
According to Wall Street consensus analyst estimates, Amex's earnings per share are projected to increase at a compound annual rate of 14.4% between 2024 and 2027. That's certainly an encouraging outlook that can support market outperformance.
However, the valuation is what concerns me. As of June 20, shares trade at a price-to-earnings ratio of 20.8. That stock has rarely been more expensive in the past three years. I don't believe this is a bargain setup for prospective investors.
For those investors that still appreciate this business and that don't really care about the above-average valuation, then it can make sense to dollar-cost average. Over several months or even years, a full position can be created with multiple purchases.
