Is There a Bull Case for American Express, or Is This Just a Technical Bounce?

Not too long ago, Wal-Mart Stores Inc. (NYSE: WMT) was the bane of Wall Street. The retailer was called a dinosaur, unable to grow in the face of modern retail threats. When Warren Buffett sold his own stake in the company in November, sentiment grew even more negative. Now shares are up over 20% since bottoming, and it’s the third best-performing Dow Jones stock year to date. Never count out a mega retailer.

The same can be said for American Express Co. (NYSE: AXP). A hated stock at the beginning of the year, it is still the worst performing Dow 30 company, both year to date and for the past year. It’s still up over 20% since bottoming though, even better than the Wal-Mart recovery. On March 10, it bullishly tested its 50-day moving average and bounced off it, and it has now almost fully filled the gap left in its 12% January 22 tumble.

The bearish case is obvious. There is little growth, impatience with corporate leadership, illustrated by the chief executive officer’s latest pay cut, a very low dividend for the price and it has been performing unimpressively despite billions in buybacks last year. American Express spent $5 billion on buybacks during 2015, reducing its share count by 5%. If the stock has declined so precipitously in the face of that decrease in supply, imagine what would have happened if those buybacks didn’t happen.

From that bearish premise though comes one bullish point. Buyback blackout periods have begun, and there is still every reason to sell American Express, but the blackout period so far has not hit shares negatively. In fact, they are still rising steadily, and shares having gone down only seven times out of 27 since bottoming on February 11.

Fundamentally though, the case for American Express is not how shares perform during a short buyback blackout. What both Wal-Mart and American Express show us is not to give up so easily on big established companies, barring any scandals, and as long as they’re not bank stocks, which can fail in a day. What credit card companies need, fundamentally, is people using credit cards. The fact is, historically speaking, for the amount of new money in the system, credit card usage is very low historically. Money velocity, which roughly measures how quickly a dollar changes hands, hit a new record low last quarter, and records go all the way back to 1959.
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While one could make the argument that shares are about to fall back down during the buyback blackout period, the other side of the coin is what happens when money velocity goes back up? That tends to happen when price inflation rises, as the two figures feed off each other. When prices rise, people spend faster. Inflation is headed higher now, with the Federal Reserve only lowering its rate hike forecasts, and the dollar has weakened.

A short-term pullback from these levels is certainly possible if not likely for American Express shares, considering the rally since February, but longer term the credit card business as a whole is likely to boom as inflation rises.