The Single Biggest Risk With Investing in This Top Warren Buffett Stock Is Something Investors Probably Aren't Even Thinking About
Berkshire Hathaway‘s public equities portfolio contains dozens of stocks. But a leading payments enterprise is one of the top holdings — and its shares have generated a fantastic total return of 131% in the past five years (as of April 24).
All companies face threats that investors should be mindful of in their stock selection process. When it comes to this financial stock, however, the biggest risk might be something you’re probably not even thinking about at the moment.
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Don’t neglect a key variable in the investment process
Warren Buffett became a legendary investor by focusing intensely on the prices he paid when buying businesses. As a value investor, the Oracle of Omaha tries to purchase stocks at less than his estimate of their intrinsic worth.
Applying this same thinking to American Express (NYSE: AXP), the conglomerate’s second-largest position, and investors probably aren’t paying attention to its valuation as much as they should. Right now, American Express trades at a price-to-earnings (P/E) ratio of 19.6.
While it has come down 24% in the past four months, the multiple is in line with the credit card giant’s trailing three-, five-, and 10-year averages. This isn’t expensive, to be clear. It’s also not a bargain, however.
One of Buffett’s core philosophies is buying a stock only when there’s a margin of safety present. If American Express traded at a P/E ratio around 15, for instance, it would be cheap enough to provide a downside buffer should any unforeseen adverse developments occur. At the current P/E multiple of 20, this might not be the case.
This is unquestionably a wonderful business
If valuation is the biggest risk factor to consider, then it means that American Express is an outstanding company. After looking at this business, any rational investor would have the same takeaway. And with Warren Buffett owning 22.1% of the company’s outstanding shares, there’s no denying this argument.
The latest financial results reveal a business performing at a high level, even though the economy is characterized by heightened levels of uncertainty from the Iran war, inflationary pressures, and worries about disruption from artificial intelligence. Net revenue and diluted earnings per share increased 11% and 18%, respectively, year over year in Q1 (ended March 31).
American Express’ premium brand attracts an affluent clientele, supporting durable spending activity. And the network effect underpinning the payments platform, connecting merchants and card members, makes the ecosystem better over time. Nothing indicates that this competitive positioning is weakening.
This financial stock is trading 18% below its record. The opportunity that the market is giving investors right now outweighs the valuation risk mentioned. I think it’s a good idea for investors to think about buying shares.
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American Express is an advertising partner of Motley Fool Money. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
The Single Biggest Risk With Investing in This Top Warren Buffett Stock Is Something Investors Probably Aren’t Even Thinking About was originally published by The Motley Fool