This week, 62 stocks make the "high-quality" list, with 18 additions and 18 deletions. Rankings will fluctuate more widely than usual as financial results continue to be reported. But for now, American Express (AXP) looks to be one of the most attractive "high-quality" stocks in the Financial sector this week.
American Express Company is a "go-to" stock in the Financials sector, the same way that Freeport McMoran (FCX) is a go-to stock in Materials. When portfolio managers speak of financials, they always want to know about AXP. We have not been able to say anything good about American Express for a long time, but this may be changing. AXP is a $47b market cap company. The company is trading at 3.2x book value, 11.0x times the calendar 2011 consensus EPS estimate of $3.55, with an annualized dividend of $0.72 and yield of 1.8%.
The stock sold off 3% this past Friday following its 3Q10 report on Thursday the night before. Revenue and earnings beat consensus, helped in part by rising card usage, lower defaults, and a release of bad debt reserves. That sounds like positive developments to us, but a number of analysts expressed concern about higher expenses and increasing risk of a decline in its merchant discount rate. They also fear ongoing pressure related to the Credit Card Accountability, Responsibility and Disclosure Act.
The risks in the details are real, but perhaps they are embedded enough in current valuations, likely ongoing analyst revision momentum and relatively low but still likely positive operating momentum. By focusing on the big picture relative to other Financial sector stocks, AXP as of today deserves a look as both a short-term and long-term holding idea.
Every week, we include in our weekly ranking report a list of the highest quality and lowest quality stocks as defined by four key factors: 1) Relative Value; 2) Operating Momentum; 3) Analyst Revision Momentum; and 4) Fundamental Quality. At the end of each month, we take roughly 1/3 of the stocks on this list to construct our various long/short and long-only model portfolios, which are rebalanced monthly.