A Financial Stock Can Be a Great Business and a Bad Investment. Here's How to Tell Them Apart.
Key Points
Based on its steady revenue and profit growth and durable moat, American Express is a high-quality business.
Had investors bought shares in the credit card company at the start of 2026, they’d be sitting on a loss right now.
Before deciding to buy a stock, investors need to check two boxes. The company in question must have favorable characteristics that point to durable success. Furthermore, shares have to be attractively priced. This sounds simple, but it might not be so straightforward in practice.
A financial stock, for example, can be a great business and still end up being a bad investment. Here's how to tell the two apart.
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American Express (NYSE: AXP) is a high-quality company. It has a track record of consistent revenue and profit growth. The annual fees it charges members have proven pricing power. The business benefits from tremendous brand strength. And there's a network effect at play since it operates a two-sided payment platform.
But when the valuation gets a bit too high, it can make for a poor investment. At the start of this year, the premium credit card enterprise traded at a price-to-earnings (P/E) ratio of around 24. The share price has fallen by 17% in 2026 (as of Sept. 25). This wonderful business has been a portfolio detractor.
At the same time, the S&P 500 index has climbed 13% this year. And now, American Express stock trades at a P/E multiple of under 19. Given that the company's fundamentals haven't changed, the current valuation offers a much better entry point for prospective investors. A good business now has the chance to be a good investment.
American Express is an advertising partner of Motley Fool Money. Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express. The Motley Fool has a disclosure policy.