Over the past five years, shares of American Express (AXP 0.68%) have produced a total return of 121% (as of March 17). The premium credit card and payments network has clearly been a successful investment that has handily beaten the S&P 500 index. Credit goes to strong fundamental performance.
In the past three months, the stock has experienced a notable sell-off, trading 22% below its peak from December. It's time for investors to make a move. Here's one obvious reason now is a great time to buy American Express.
Image source: The Motley Fool.
Mr. Market is feeling generous
It helps retail investors gain confidence knowing that a legendary capital allocator owns a business that they are interested in. This is the case with American Express (Amex for short): It has been a top holding of Berkshire Hathaway for decades. That Warren Buffett endorsement is comforting.
The issue, though, had been that Amex was a bit too expensive for my liking. Just three months ago, the stock traded at a price-to-earnings ratio (P/E) of 25.6. Today, the situation has become much more attractive. Investors can buy shares at a P/E of 19.5.
NYSE: AXP
Key Data Points
The huge sell-off was propelled in late February after the release of the artificial intelligence (AI) doomsday report by the research publication Citrini, which entertained the idea that this technology would lead to significant job losses. The market started worrying about the potential impact this would have on spending activity across the economy. So, Amex was hit hard, as were other consumer-financial stocks.
Focus on the fundamentals
Despite what market sentiment and stock prices say, investors must always return to the fundamentals. Buying Amex shares makes no sense if the business is struggling and doesn't have a bright future. But this isn't the case.
Last year, it generated $72.2 billion in net revenue, up 10% compared to 2024 and 36% higher than in 2022. Management expects the top line to grow 10% or more per year over the long run. It leans on its ability to bring in new cardholders, particularly younger consumers, while also boosting spending volume and fees over time.
The company expects profits to rise even faster. Its long-term outlook calls for earnings per share to increase at a mid-teens annual clip. Assuming the stock's valuation remains constant, the share price can mimic these bottom-line gains.
Five years from now, American Express is poised to generate much higher revenue and profits than it does now. Investors who buy the stock on the dip are setting themselves up to capture a winning return.
