Longtime Buffett Favorite on the Verge of a Breakout

If I had a nickel for every time I read the advice I should invest like Warren Buffett… I’d have a whole lot of nickels.

The Oracle of Omaha is revered for good reason: The stocks he picks tend to go up. And today’s pick has been a Buffett favorite since 1991. At that time, he invested $ 300 million in the company. Today, he controls more than 10% of the credit card provider American Express (NYSE: AXP).

As the stock’s outstanding performance shows, many of the stocks Buffett backs are likely to be good trades. Since its 2009 low, AXP is up nearly 900%, compared with roughly 200% for the S&P 500.

One aspect that surely attracted Buffett to the stock is the company’s strong foothold in the credit card market, which is controlled by three major players. Visa (NYSE: V) has the largest share with roughly 45%. Next comes American Express with just over 25%, and then Mastercard (NYSE: MA) with just under 25%. The final player, Discover Financial Services (NYSE: DFS), lags far behind with just 5%.

While Visa and Mastercard cast a wide customer net, American Express differentiates itself by appealing to the affluent consumer. For the privilege of being able to target the upper class, merchants pay the company 3% sales commission, compared to 2% received by major competitors. Research shows AXP customers charge 53% of their personal spending to their card versus about 34% for other cardholders.

On many card products, American Express receives no interest. With its American Express Platinum card, for example, cardholders must pay their full balance within 30 days of the statement’s receipt. The company makes up the lost interest in annual fees. The platinum card costs holders $ 450 a year, much higher than Mastercard’s or Visa’s premium entries.

With cardholder spending on the rise, combined with new initiatives to expand card acceptance domestically, internationally and with smaller merchants, the stock shows solid growth potential.

The current chart is a picture of strength; however, that wasn’t always the case. In 2007, just before the financial crisis, shares traded in the mid-$ 60s. By 2009, they hit a low under $ 10.

As the financial crisis waned, AXP recovered rapidly. By 2010, shares had made a marked recovery to nearly $ 50, where they plateaued, trading sideways in a fairly narrow range between $ 40 and $ 50 from early 2010 to late 2011.

After probing $ 40 support one last time in the fall of 2011, AXP rallied. By April 2012, it hit resistance at $ 60, not far below the 2007 peak.

Not surprisingly, the stock was unable to penetrate this important resistance level. For the remainder of the year, it traded sideways with support just over $ 50 and resistance just under $ 60.

The current uptrend began in November 2012 near $ 52. Since that time, AXP has been in a steep uptrend, nearly doubling in a year and a half. While there have been brief periods of consolidation, the uptrend has been marked by steadily increasing peaks.

On the last day of 2012, shares penetrated $ 90 for the first time in their history. From there, the stock retreated to the low $ 80s and twice had marginal breakouts into the mid-$ 90s. For the past two weeks, it has consolidated just under its all-time high near $ 96.

AXP now appears to breaking out of an ascending triangle. According to the measuring principle for this formation, found by taking the height of the triangle and adding it to the breakout level, the minimum target on a breakout would be $ 107.89. This represents a 13% gain from current levels.

There is a clear stop-loss point formed by the major uptrend line, which intersects the chart just below $ 90. This puts the reward/risk ratio at a healthy 2:1.

The bullish technical outlook is supported by strong fundamentals. Analysts project revenue for the upcoming second quarter will increase 5% year over year to $ 8.7 billion. Full-year 2014 revenue is expected to increase 4.5% to $ 34.5 billion.

The earnings picture is equally strong. Q2 earnings are estimated to be 8% higher than the same quarter a year ago, at $ 1.37 per share. Analysts expect full-year 2014 earnings will rise 12% to $ 5.45 per share.

In addition, the company has a forward annual dividend yield of 1.1% ($ 1.04 per share). In the most recently reported quarter, management announced plans to increase the quarterly dividend 13% and repurchase up to $ 4.4 billion in shares this year.

Risks to consider: As consumers become increasingly reliant on mobile phones, mobile payment solutions are the way of the future. While AXP is not currently a leader in this technology, the company is focused on strengthening its performance here. It recently announced a strategic alliance with venture capital-backed mobile payment startup Uber. In the future, AXP will need to continue adapting to this technology.

Recommended Trade Setup:

– Buy AXP at the market price
– Set stop-loss at $ 89.85
– Set initial price target at $ 107.79 for a potential 13% gain by late fall