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American Express

DOW component: American Express Company (AXP)

Recommendation: Buy

Time Frame: Six months, re-evaluate at the end of the year

Why AXP? (Fundamental Analysis):

AXP serves a global payment system. Its primary products are credit cards and other payment options for tourists, consumers, and corporate, such as charging and lending cash on credit, issuing traveler checks, and prepaid credit cards. AXP has had more market share than its competitors, including Bank of America (BAC), and Citigroup (C). Since the start of 2009, it outgrew both BAC and C by a high percent.

At the first glance, AXP is everything a good firm should be. The management team is headed by Kenneth Chenault (CEO and Chairman), a Harvard Law school graduate who has been with AXP since 1981. Ebony magazine ranked him has “one of fifty living pioneers”. AXP’s balance sheet is also strong compared to its competitors, despite recent troubles in the financial sector. Asset to Liability ratio is 1.10, versus Citigroup’s 1.07. Its Earning Per Share is higher than BAC and C’s EPS four times. In fact, AXP’s trailing P/E ratio is 11.12, compared to BAC’s 16.16. These crucial data proves AXP is a strong firm backed by satisfactory cash, meaning its stock price should not plummet short-term. However, book value shows the firm is a little overvalued. Price/Book ratio is 2.44, while BAC is 0.31 and C is 0.25. Since stocks tend to even out according to its book value, AXP should be a short-term investment.

When to enter the market? (Technical Analysis):

Recent resistance of $22.5 was broken by high volume on April 24, becoming a support. As of April 30, RSI is closing 70, meaning AXP is overbought. Enter the market when price falls back to its $22.5 support and RSI drops to about 60. The 50 day simple moving average shows signs of recovery from April 24 surge, so a crossover of the MA(50) and MA(200) will be another good indicator to enter.

When to leave the market?

Taking a 20-25% profit is a good percentage, according to William O’Neil, founder of Investor’s Business Daily newspaper and creator of the CAN SLIM investment strategy. A 7-10% loss is a sign to leave the market. Watch out for red flags like new highs on light volume, or heavy volume without much change in price.

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