Charged up over Amex

11/24/2016 10:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

The prospect of a steeper yield curve is boosting financial stocks, and there's one stock within the sector that I like enough to now add to our model portfolio, notes Jack Adamo, editor of Insiders Plus.

American Express (AXP) has had a rough couple of years because it lost its co-branding deals with Costco and Fidelity Investments. Both were a low-cost source of new members.

I'm fine with the termination of those relationships. The company lost the deals because it wouldn't pay more than what it thought they were worth. That takes discipline on the part of management.

American Express faces tough competition; but what that pessimistic view misses is that up until now, fees at Amex have comprised more than three and a half times the revenue that interest income has.

Now the company is expanding its lending services to members, and will be in a position to take advantage of rising rates and wider interest rate spreads to boost its top line.

Within a couple of years I think it will be bringing in its highest revenue ever, and with wider profit margins.

Of course, if the overall market takes it on the chin, Amex will probably stumble too, but it's very well managed and will recover and thrive in time.

Also consider that Warren Buffett has not sold a single one of the 151.6 million American Express shares that he and Berkshire Hathaway have held for more years than I can count.

Although the company's accounting is very clean, it has used share buybacks extensively during the recent downturn in revenues to boost its earnings per share. In fact, it is one of the companies that bought back more than 7% of its shares outstanding this quarter.

However, I calculated the stock's p/e ratio using the share count from last year, not the present reduced count, and the stock's GAAP p/e is still only 15.4, compared to the S&P 500's 22.8.

On a Shiller 10-year Cyclical p/e basis, the stock is at 19, compared to 26.5. So, it's significantly cheaper, despite having an historical performance that trounces the market's.

The company has delivered an annualized return to shareholders of 9% per year compounded for the last twenty years vs. 5.2% for the S&P 500. We have the opportunity now to buy it after a big drop.

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By Jack Adamo, Editor of Insiders Plus

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