The Best Warren Buffett Stock to Invest $500 in Right Now

After an incredible 65-year journey at the helm, Berkshire Hathaway CEO Warren Buffett has announced he will be stepping down. Under his leadership, Berkshire has delivered exceptional returns for investors and become a source of investment ideas. Buffett's investing principles, along with those of his esteemed partner, the late Charlie Munger, have been key to Berkshire's remarkable 20% compound annual returns since 1965.

One of the crown jewels in Berkshire's public stock portfolio is American Express (NYSE: AXP). This iconic credit card brand is synonymous with luxury, making it a favorite among consumers. Following recent market fluctuations, American Express is now trading 15% below its 52-week high, presenting a compelling buying opportunity for investors today.

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American Express' brand advantage

When it comes to the payments landscape, American Express is a smaller player in a crowded field dominated by giants like Visa and Mastercard. To put things into perspective, in 2023, American Express processed $1.7 trillion in credit card purchase volume, or a 9% share of global purchase volume. This figure is dwarfed by the impressive totals of its competitors: Visa racked up $6.3 trillion (33% share), while Mastercard wasn't far behind with $4 trillion (21% share).

Unlike Visa and Mastercard, which partner with banks to issue cards and manage credit risks, American Express takes on both roles. It operates a closed-loop payment system, meaning it processes transactions and also manages the credit it extends to customers. This dual role allows it to maintain a direct relationship with its users.

Despite its smaller size, American Express has carved out a niche by focusing on affluent consumers. Since the launch of its first charge card in 1958, the company has prioritized attracting high-spending customers who tend to have lower default rates. This strategy not only helps establish a steady stream of revenue but also provides resilience during economic downturns.

Warren Buffett agrees that American Express' brand is one of its strongest selling points. When American Express CEO Stephen Squeri took over the top role in 2018, Buffett told him that "the most important thing about American Express is the brand and the customers that aspire to be associated with the brand."

Keep an eye on the business outlook

American Express faces stiff competition, and the consumer-lending segment is vulnerable to economic fluctuations, making it a cyclical stock.

Given current uncertainties around tariffs, increased costs for consumer goods could impact consumer spending. If the economy slows down or consumer spending decreases significantly, American Express could see a decline in transaction volumes and, consequently, earnings.

Another thing to consider is that American Express extends loans to consumers. If more people start defaulting on these loans, the company may need to increase its reserves to cover these potential losses. This reliance on consumer lending is partly why American Express has a lower price-to-earnings (P/E) ratio compared to its competitors, Visa and Mastercard.

Image source: Getty Images.

In the first quarter, the company reported a network volume of $439.6 billion, which represents a 5% increase from the previous year. Additionally, as interest rates have risen over the past few years, American Express has benefited from its consumer loans via higher net interest income, which climbed 11% to reach $4.2 billion in the same period.

Also, the company's credit quality has remained relatively stable. At the end of Q1, only 1.3% of its card loans and receivables were more than 30 days past due, and net write-offs stood at 2.4%. Both of these metrics have remained steady over the past year, showing that consumers continue to hold up well.

A solid stock for long-term investors

American Express is a powerhouse in the financial sector, boasting a robust brand and impressive performance metrics. The recent drop in stock prices created an opportunity for investors. The stock's P/E ratio fell from 23.2 to 19.3, and I used the recent sell-off to add shares to my portfolio.

Legendary investor Warren Buffett has long believed in American Express, and I believe it's an excellent stock for investors to add some shares today. If the market dips further later this year as we navigate uncertain times, investors should be ready to buy more shares of this stellar blue chip stock.

Should you invest $1,000 in American Express right now?

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American Express is an advertising partner of Motley Fool Money. Courtney Carlsen has positions in American Express and Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Fool has a disclosure policy.