Cheapest credit card? American Express
Posted
Apr 03 2008, 08:53 PM
by
Jon Markman
Rating:
Bummed that you missed the skyrocketing advance of credit card vendor Visa when it debuted as a stock last month? The 50% move higher in the shares in the first few days paid for a whole lot of shopping sprees among shareholders, you can be sure -- and they could pay with cash, not plastic.
Well fret no more, because this crazy market is giving you another shot right now with the shares of the company behind a different credit card issuer: American Express. And the author of a brilliant new book about buying super-discounted stocks says this is one idea you should definitely not leave home without.
Vitaliy Katsenelson, a Denver portfolio manager whose cagey Active Value Investing was published last year, says Amex is one of the “cleanest” financial stocks you can buy right now, not to mention one of the cheapest. Its value is down, he says, because it is mistakenly lumped in both with banks and with companies that will suffer in a recession. He says that, to the contrary, Amex is in the virtually the same business as Visa and Mastercard, whose own shares are up a stunning 406% since they debuted in mid-2006: They just take fees from merchants and earn interest on cardholders’ balances.
Although investors are worried about rising default rates and lower spending levels, Katsenelson thinks neither are bothersome enough to impede the stock because shares have fallen to a level at which the worst fears are already discounted. He’s looking for shares to go to $65 over the next 12 months, which would be a 40% move.
Born and raised in the Arctic Circle town of Murmansk, the Russian portfolio manager naturally views the markets with ice-cold dispassion. Deep historical research has persuaded him that seemingly high-danger moments like the present offer the best opportunities to buy high-quality stocks that are growing earning and paying dividends so long as their price/earnings multiples are low enough -- and their balance sheets are debt-free enough -- to provide you with a margin of safety.
Unlike many value investors, though, Katsenelson thinks you should make it a goal to hold stocks only until they rise to fair value – not forever. One reason: His work shows that stocks over the past century have spent half their time in bull markets and half their time in “range-bound” markets that slowly cycle higher and lower but don’t make much progress when examined over multi-decade spans. He believes the last “secular” bull market ran from 1982 to 1999. In 2000, he says, stocks began a new range-bound period that has started with one cyclical bear phase (2000-2002), then progressed into a cyclical bull phase (2003-2007) and are now back in a cyclical bear phase.
The key killer in bear markets is not earning growth slowdowns, as most people think, he says, but price/earnings multiple compression. (See his interview in Active Investing magazine for a full discussion.) As an example, he notes that Wal-Mart earnings tripled from 2000 to the present but shares have remained virtually constant because its 44 P/E multiple has slipped to 17 as investors collectively decided they would pay less of a premium for every penny of earnings. Other stocks he likes right now: Water and defense technology specialist ITT and apparel retailer Jos. A. Bank.
