We recently compiled a list of the 12 best long-term stocks to buy according to Warren Buffett. In this article, we are going to take a look at where American Express Company (NYSE:AXP) stands against the other long-term stocks to buy according to Warren Buffett.
Warren Buffett, the most famous investor on Wall Street, needs no introduction, having generated billions of dollars for himself and investors for decades. Throughout his investment career that began in 1965, the ‘Oracle of Omaha’ has averaged annual returns of 19.8%, trumping a gain of 9.9% for the S&P 500 over the same period.
The market-beating performance has propelled Buffett to the top of the charts as one of Wall Street’s most revered and followed investors. His investment portfolio is always tracked as investors scan for potential market opportunities.
READ ALSO: 10 Best Debt-Free Penny Stocks to Buy Now and 10 Best Counter Cyclical and Defensive Stocks to Invest In.
Likewise, Buffett is one of the most successful investors in Wall Street’s history, having accumulated a fortune of $138 billion. His total assets might have been significantly higher if he hadn’t donated large sums to different charitable causes.
Market participants have always applauded his disciplined approach, which entails a long-term perspective. His investment firm has become the latest company to cross the $1 trillion mark on market cap, underlining Buffett’s impressive stock-picking skills. According to Cathy Seifert, Berkshire analyst at CFRA Research, the $1 trillion milestone is a testament to Buffet’s investment firm’s financial strength and franchise value.
Buffett’s investment strategy has remained constant throughout his career, focusing on the concept of value investing. The strategy focuses on identifying companies that are undervalued but have the potential to increase in value over time. Buffett seeks out companies with a lasting edge over competitors, like a well-established brand, high barriers to entry, and a large and loyal customer base, and he buys into them at a price that ensures a safety margin.
Likewise, the billionaire investor is well-known for his cautious stance on investing in high-risk, high-reward sectors like technology. Instead, he prefers to invest in more stable sectors such as retail, insurance, and finance. He is recognized for his commitment to long-term investments, holding onto companies for extended periods, and steering clear of frequent trading. This strategy enables him to benefit from the compound interest effect and allows the companies he invests in to mature and produce significant profits.
Buffett’s cautious approach is evidenced by the fact that his investment firm had over $180 billion in cash as of the end of the first quarter. The cash reserves were expected to swell to over $270 billion as of the end of June.
The cash reserves have been building up as the billionaire investor only invests in finding attractive deals with eye-popping returns. In a 2023 letter to shareholders, Buffett reiterated he did not see the possibility of eye-popping performance.
Buffett has consistently included dividend stocks in his portfolio, which is a strategy that has effectively generated consistent passive income. This year alone, his investments are projected to generate around $6 billion in dividend earnings.
Nevertheless, Buffett has also been in defensive mode in recent months, opting to reduce stakes in some companies. He has trimmed holdings by up to half in some tech giants, concerned by valuations getting out of hand after a year of gains fuelled by the artificial intelligence frenzy.
While valuations have gotten out of hand going by the blockbuster gains over the past year, there are still opportunities to unlock. With the US Federal Reserve poised to end its monetary easing spree with a cut of interest rates, equity is poised to receive a significant boost.
The best long-term stocks to buy, according to Warren Buffett, are companies well poised to benefit from interest rates dropping. Low interest rates make it easier for companies to access cheap capital to accelerate their operations, generating more shareholder value.
Our Methodology
To compile our selection of the best long-term stocks to buy according to Warren Buffett, we began by analyzing Berkshire Hathaway’s 13F portfolio and chose to highlight the stock holdings that have remained within the portfolio for at least 5 years. Next, we assessed the number of hedge fund investors associated with each stock, as of the end of the second quarter of this year. Finally, the stocks were ranked in ascending order based on the value of Warren Buffett stakes in the companies.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up view of a payment terminal, capturing the sophistication of a payment network.
American Express Company (NYSE:AXP)
Warren Buffett’s First Major Purchase: 2010
Berkshire Hathaway’s Latest Investment Stake: $35.11 Billion
Number of Hedge Funds Holding Stakes as of Q2: 68
American Express Company (NYSE:AXP) is one of Buffett’s top stock picks in the financial services sector, operating as an integrated payments company. Its products and services include credit cards, charge cards, banking, and other payment and financing products.
The company is increasingly outperforming other credit card companies, offering significant upside potential for long-term investors. The company’s strong financial performance, robust sales expansion, and youthful clientele are key factors that affirm its long-term prospects.
The youthful clientele base positions American Express Company (NYSE:AXP) as a top choice for credit card investments. The financial technology company reported gaining an additional 3.4 million credit card accounts in the first three months of 2024. Furthermore, American Express noted that millennial and Gen Z individuals “were responsible for over 60% of new credit card account openings worldwide.
Revenue in the second quarter increased by 8% compared to the previous year, and when adjusted for changes in currency values, it jumped to 9%. What’s even more remarkable is the substantial increase in earnings per share (EPS). The payments company’s EPS jumped by 44% year over year. The company’s distinctive business approach is remarkably effective at generating profits in various markets.
American Express Company (NYSE:AXP) meets the standards as one of the best long-term stocks to buy, according to Warren Buffett, owing to its consistent earnings power and fundamental strength through both a growing bottom line and dividend.
While trading at a price-to-earnings multiple of 17, the stock offers a 1.10% dividend yield for generating some passive income. Its dividend per share payout is up by 165% over the past ten years, affirming American Express’s ability to generate free cash flow for distribution regardless of the prevailing business environment.
As of June 2024 end, 68 out of the 912 hedge funds covered by Insider Monkey’s research had invested in American Express Company (NYSE:AXP). Warren Buffett’s Berkshire Hathaway was the biggest shareholder through its $35.11 billion stake.
In its Q1 2024 investor letter, Artisan Select Equity Fund commented on American Express Company (NYSE:AXP) as follows:
“American Express Company (NYSE:AXP) shares rose 22% this quarter. This is an interesting case study given our earlier discussion about inflation. American Express operates one of the largest credit card networks in the world. Its revenue is largely a function of a fee rate applied to the dollar value of goods and services that are transacted through its network. That dollar value is, of course, nominal. As inflation pushes up the value of those goods and services as it has for the past few years, American Express will capture that value through its fee structure. The past few years inflation has clearly been a benefit. Aside from its inherent inflation protection, the business is a very strong one. Payments continue to shift toward electronic forms, benefiting American Express. It also has a strong brand that attracts loyal and highly profitable customers that are the envy of the industry. Recent results have been strong with revenues moving nicely ahead of GDP.”
Overall AXP ranks 3rd on our list of the best undervalued cyclical stocks to buy. While we acknowledge the potential of AXP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AXP, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.