This Particular Buffet Preference Currently Appears Overpriced for Purchase
Warren Buffett's Berkshire Hathaway (BRK.A -0.50%, BRK.B -0.49%) holds approximately $40 billion worth of shares in American Express (AXP -0.73%), making it a significant shareholder. With a market cap of around $220 billion, Buffett has a substantial stake in this financial giant.
At first glance, this might suggest that Buffett is expecting major returns from American Express. However, it's unlikely. Buffett's investment philosophy, heavily influenced by his mentor Benjamin Graham, preaches caution against overpaying.
American Express is a compelling business in the payment processing sector. It earns fees by connecting buyers using its logo-emblazoned cards with sellers of goods and services. With a focus on high-net-worth customers, American Express boasts a resilient clientele during economic downturns, helping it differentiate its services. The company's brand status is attractive to its desired clientele, too.
Despite its solid fundamentals, American Express' stock may appear overvalued based on traditional valuation metrics. These metrics include a high price-to-earnings ratio (P/E) and price-to-sales (PS) ratio, along with some other ratios above their five-year averages. Furthermore, the dividend yield is lower than the S&P 500. Buffalo's ownership of the stock may be due to his long-term investment strategy rather than an enthusiastic recommendation to buy now.
Remember, just because Buffett invests in a company does not necessarily mean it's an automatic buy for individual investors. Wait for a major price decline, treating American Express as a wishlist stock, before adding it to your portfolio. It's crucial to approach investments with a critical, value-focused perspective, as taught by Buffett and his mentor, Graham.
Despite Buffett's substantial investment in American Express, he might not be expecting significant returns due to his cautious investment philosophy. To follow Buffett's approach, one might consider waiting for a price decline before considering investing in this potentially overvalued company.
