American Express: Buy, Sell, or Hold?

American Express (AXP -0.96%) has been on an absolute tear. Investors couldn’t be happier, as shares have soared 89% just in the last 11 months. During the same period of time, the S&P 500 generated a total return of 41%.

American Express is a top Warren Buffett stock. But for your personal portfolio, is this credit card and payments giant a buy, sell, or hold right now?

A leader in the financial services industry

There is no shortage of reasons for investors to want to buy this business, even though shares of American Express have ascended rapidly in the past year. The company’s economic moat comes to mind as a compelling trait that shouldn’t be forgotten.

For starters, Amex possesses a very strong brand in the financial services industry, one that’s known for luxury and premium perks. People are willing to spend hundreds of dollars in annual fees in order to carry an American Express credit card in their pockets. The brand’s positioning helps draw in higher-income consumers, which leads to industry-leading net charge-off rates.

Another aspect of Amex’s moat is the presence of network effects. Like Visa and Mastercard, American Express operates a payments platform that connects cardholders and merchants across the globe. It’s not difficult to understand the value each stakeholder receives. Merchants and consumers want to be Amex customers because of the presence of the other group. And this network effect gets stronger the larger the business becomes.

Besides the moat, American Express is a worthy investment candidate because of its impressive financial performance. After revenue jumped 14% in 2023, management expects it to rise 10% this year (at the midpoint). And the business is also consistently profitable, a factor that some investors might take for granted. The net profit margin was a stellar 18.5% in the latest quarter.

Consider the valuation

About 11 months ago, before Amex went on its latest stock run, shares traded at a price-to-earnings (P/E) ratio of 13.5. Today, the valuation is not nearly as compelling, as the stock goes for a P/E multiple of 20.2. Compared to its trailing-five-year average, the current valuation is slightly more expensive.

For prospective investors, the P/E ratio might not be a reason to immediately buy shares. However, for existing shareholders, it’s also not too expensive that it warrants selling the position. The above factors I discussed point to this being a solid business.

The case to sell American Express

However, I can also certainly understand why some investors would still decide to completely ditch their Amex holdings. Perhaps they’ve held the stock for a while and now feel like it’s the right time to take profits off the table. This decision can be even easier to make if there are more compelling places to park that capital in new investment opportunities.

Critics might also be discouraged by the intense competition in the industry. Amex has a strong position, but there are so many credit cards being offered by numerous banks and fintech enterprises these days. The belief could be that it will be difficult for American Express to continue standing out.

Another reason to sell shares is if you believe the economy is headed for a severe recession. In this scenario, Amex could see delinquencies and charge-offs soar as consumers struggle to make their payments. Earnings would take a hit, which would pressure investor sentiment.

There are valid points on all sides when it comes to American Express. I don’t believe the stock is a no-brainer buy at the current valuation. But I do think existing shareholders should stay put, as this is still a wonderful business.