Here’s another pick of stocks Warren Buffett has nailed during the pandemic
Legendary investor Warren Buffett and his company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) was criticized earlier in the pandemic for selling off some stocks, particularly in the banking sector, which have since performed quite well – Wells Fargo and Goldman Sachs come to mind.
But the Oracle of Omaha also made calls that went well, like pumping billions into Bank of America. And Buffett and Berkshire appear to have, for the most part, calculated correctly, with Berkshire’s stock at all-time highs. Another decision Buffett made during the pandemic that I think is being overlooked is the decision to maintain Berkshire’s prominent position in the credit and charge card company. American Express (NYSE:AXP), which is now trading at all-time highs. Here’s why.
Not as easy as it looks
Although the decision now seems obvious, I see Buffett’s decision to maintain Berkshire’s stake in American Express as another reason why he is one of the greatest investors of all time. In the early months of the pandemic, no one knew what was going to happen with the economy. A recession came suddenly and banks braced for massive amounts of loan losses as people limited physical interaction and the economy more or less came to a screeching halt for weeks or even months of in a row.
At this point, Buffett decided to be more selective about which banks he kept in Berkshire’s portfolio, as he didn’t like the company’s degree of exposure to the sector. Credit card debt, in particular, tends to experience higher loan losses than other loan categories because consumers are less likely to repay their debts when they encounter financial difficulties. After the Great Recession, credit card loan write-offs, which measure probable losses as a percentage of the overall loan portfolio, jumped to 11%.
Additionally, before the pandemic, about a third of American Express’ billed business — which represents spending on American Express credit cards — came from the travel and entertainment sectors, industries that have yet to fully recover from the pandemic. the pandemic.
But American Express has long held a top position in Buffett’s portfolio. Berkshire currently owns 151.6 million shares, making American Express the conglomerate’s third-largest holding in Berkshire’s stock portfolio. Clearly, Buffett had all the faith in the world in the brand that American Express has built over time, as well as in CEO Steve Squeri and the rest of senior management to guide the company through the pandemic.
Buffett’s belief in American Express is now paying off. The stock recently closed at $194 per share, an all-time high. Valuation based on price versus tangible book value, which looks at a company’s market capitalization relative to its value if it were liquidated, is a whopping 670%. That’s well over double the valuation of any of the other major credit card companies like Discover financial services, Synchrony Financialand Capital one trade at.
American Express also appears to be emerging from the pandemic in better shape than when it entered. Loan growth finally appears to be returning, and American Express’ ending loan balances jumped more than 15% in the fourth quarter. While total network volume has returned to pre-pandemic levels, billed business in travel and entertainment in Q4 2021 was only 82% of volumes seen in Q4 2019. This is expected to continue to recover as that the pandemic continues, hopefully. tend to become endemic and people start to travel again. In fact, you might see spending in this segment increase if there’s pent-up demand to travel.
Finally, American Express raised its earnings per share (EPS) and revenue growth projections to levels above what the company had envisioned before the pandemic. In 2022, American Express expects to generate EPS of $9.25 to $9.65 on revenue that is expected to increase 18% to 20% from the $42.4 billion the company made in 2021. The EPS should actually be lower than the more than $10 EPS American Express has done this year, but that’s because of one-time events like the release of reserves previously stored away from loan losses, which helps increase income.
For 2024 and beyond, American Express expects to be able to increase EPS in mid-teen percentages and revenue by more than 10%. Prior to the pandemic, management typically expected 8% to 10% revenue growth and double-digit EPS growth.
What we can learn from Buffett
Sticking with American Express has probably not been an easy decision for most investors during the pandemic, given the high level of charges the credit card industry can suffer during a downturn and the way travel and entertainment have been affected. But for Buffett, the decision was probably quite easy due to the high belief he had in the title, his knowledge of the business and his confidence in management’s ability to steer the company to success. long-term. Buffett’s decision to stick with American Express during the pandemic is something all investors can take inspiration from.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.