As of this writing, Berkshire Hathaway is now in the trillion-dollar club, joining a short list of businesses to make the cut. Warren Buffett's conglomerate fully owns multiple businesses in a range of industries, but it also has a gargantuan portfolio of public equities.
Apple gets a lot of the attention. But there's a financial stock that is currently Berkshire's second-largest holding that investors need to know about. In fact, the Oracle of Omaha currently owns more than 21% of this company.
Continue reading to learn what business this is and whether it should be in your personal portfolio.
A strong competitive position
Buffett knows a thing or two about the financial services sector, given his heavy investments in the industry. So it's notable that his company has such a sizable stake in American Express (NYSE: AXP) , the credit card issuer and payments handler. Berkshire has owned shares in the company since the 1990s, and it's not too difficult to understand why.
That's because Amex is a high-quality business. It has a wide economic moat that protects its competitive advantage. I believe there are a few factors to consider here. American Express is a very strong brand due to the company's premium cards, like the Centurion Black Card, the Platinum Card, and the Gold Card. All have high annual fees, with impressive perks and rewards that help attract a more affluent customer base.
In addition, these cardholders are generally safer from a credit perspective than the average consumer. This explains why Amex typically has lower charge-off rates than its peers, like JPMorgan Chase , Bank of America , and Capital One . In an adverse economy, Amex is positioned to not be hurt as much.
Network effects also support Amex's moat. The company is similar to Visa and Mastercard in that it operates the communications infrastructure that eases the processing of transactions. Consequently, the larger the network gets, the more valuable it becomes to all stakeholders.
It's like a positive feedback loop. For example, a merchant that wants to boost its sales would be compelled to support Amex transactions because those cardholders have a higher ability to spend. With more businesses accepting the card -- coupled with top-notch benefits -- more people are drawn to being Amex customers.
Warren Buffett appreciates businesses that have economic moats, so I'm sure this is one reason Berkshire has such a sizable stake in American Express.
Amex's valuation
In the past five years, Amex's shares have generated a total return of 131%, which outpaces the 107% gain of the broader S&P 500 . That's a stellar track record. Today, the stock trades at a price-to-earnings ratio (P/E) of 19.2. That's slightly higher than Amex's trailing three-, five-, and 10-year average P/E multiples. As a result, I think it's accurate to say that the stock could be fully valued.
If you're an investor who is strict when it comes to the P/E you pay for a stock, then I can understand why you wouldn't want to buy Amex right now. On the other hand, if valuation is less of a concern for you, it makes sense to want to own a business that is so revered by Buffett and that has a recent track record of market outperformance.
I do appreciate paying the right valuation, but I believe Amex is an outstanding business that still warrants a closer look for your portfolio. The company has a history of posting solid revenue and earnings growth. And it could continue being a winning investment.
Should you invest $1,000 in American Express right now?
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, JPMorgan Chase, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy .
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