When picking stocks, investors need to meet two core criteria. A company must boast durable, strong fundamentals, and its shares must trade at an attractive valuation. The principle sounds straightforward, yet execution is far from easy. Even a high-quality business can turn into a poor investment if its stock is too expensive, as illustrated by Berkshire Hathaway’s major holding American Express (AXP).
American Express ranks as Berkshire Hathaway’s second-largest stock position. Berkshire owns 22.5% of the firm’s outstanding shares, with the stake valued at $46.3 billion. Berkshire’s overall equity portfolio totals $356 billion, and its holdings are heavily concentrated in a small number of leading companies.
American Express is widely regarded as a high-quality enterprise. It has delivered consistent revenue and profit growth over time. Annual membership fees reflect solid pricing power, backed by an extremely strong brand and network effects from its two-sided payment platform. Still, a strong business does not guarantee a profitable investment.
At the start of 2026, the premium credit card provider traded at around 24 times earnings. As of September 25, its shares have fallen 17% year-to-date, underperforming the S&P 500’s 13% gain over the same period. The stock is also 21% below its all-time high hit in December 2025. Its P/E ratio has declined to 18.6, a 23% drop from the start of the year. The company’s fundamentals remain unchanged, meaning the valuation reset opens up a more compelling entry point for prospective investors.
Two factors are set to drive shareholder returns: valuation expansion and earnings growth. The stock could see its P/E multiple rebound to 20 over the next five years, delivering valuation upside. Management outlined guidance in January for mid-teens long-term growth in earnings per share. The combination of valuation recovery and rising profits could double the share price within five years. A $1,000 initial investment may grow to $2,000 by late 2031, assuming American Express maintains steady operational performance.
This case underscores a core tenet of value investing: investors must separate great businesses from investable stocks. Strong fundamentals lay the foundation, but purchase price ultimately shapes returns. Even Warren Buffett’s long-held American Express position faces drawdown risk when valuations stretch too far. Only after valuations cool down can top-tier assets present meaningful investment opportunities.
