Don't Leave Home Without AmEx?

04/15/2009 1:00 pm EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says a recent Barron’s cover story about the charge-card giant may not mark the beginning of a new buying binge.

According to a recent Barron's cover story (“Charge!,” April 13th), American Express Company's (NYSE: AXP) "outlook isn't nearly as hopeless as is commonly thought on Wall Street." Despite the company's mistakes during the subprime mortgage boom, the bulk of its revenue and earnings are derived from fee-based income instead of the extension of credit. As Barron's puts it, "This is because charge cards, which are supposed to be paid off monthly, make up a substantial share of American Express's volume."

Analysts tend to agree with this positive assessment, as William Ryan of Portales Partners recently issued a Buy on the stock at $15 per share. "Most people are going to miss the party if they wait for the turn in credit losses," says Ryan, [who] also believes that AmEx could "at least a double over the next year or two."

Despite William Ryan's exuberance and Barron's belief that AmEx is set to emerge stronger than its peers from the current crisis, not many analysts are on the bullish bandwagon. For instance, only four of the 15 brokerage firms following AXP rate the shares Buy or better, according to Zacks.

Clearly there is room for improvement among Wall Street analysts, but they don't lag too far behind the investing public. Specifically, AXP's Schaeffer's put/call open interest ratio (SOIR) of 1.17 indicates that puts outnumber calls among options with less than three months until expiration. This ratio ranks above 58% of all those taken during the past year, underscoring the apprehension among speculative investors.

On the other hand, during the most recent reporting period, the number of AXP shares sold short rocketed more than 21% higher, to account for about 4.5% of the stock's total float. While the added selling pressure could have been a detriment for the security, the shares extended their short-term rally amid the rising bearish sentiment. (AXP’s shares soared 24% from the opening Friday before the Barron’s article appeared until Monday’s close, on very heavy volume. It closed below $18.50 Tuesday after big profit-taking—Editor.)

From a technical perspective, the stock is hovering near resistance in the $20 area. Meanwhile, the 40-week moving average is hovering near the $25 level—a region that capped the shares in mid-December 2008.

Finally, the company is slated to release its quarterly earnings after the close on Monday, April 20. Analysts are currently expecting a profit of 16 cents per share from AXP, down sharply from 82 cents in the same quarter last year.

If American Express is weathering the storm as well as the Barron's article professes, then this earnings report could force the remaining AXP bears to capitulate to the stock's budding up trend. If not, the stock could see an exodus of bullish investors seeking to take profits while the shares are still trading well north of their March lows.

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