1 Top Warren Buffett Stock Down 28% That Could Double Your Money in 5 Years

In the past 40 years, Berkshire Hathaway has compounded shareholder capital to the tune of 40,000%. The conglomerate has done this under the direction of Warren Buffett, arguably the greatest capital allocator ever who knows how to pick winners.

There's one top holding for Berkshire, representing 13.8% of the portfolio, that might interest average investors right now: American Express (NYSE: AXP). The Oracle of Omaha's firm controls about one-fifth of the business.

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The stock is trading 28% off its record, spurred by an alarming 10% drop on April 3 probably driven by fears that tariffs will pressure spending activity. Nonetheless, I think the setup here could lead to a doubling of your money in the next five years.

Passing Buffett's quality screen

"It's far better to buy a wonderful company at a fair price, than a fair company at a wonderful price," Buffett once said. There's no denying that American Express fits the bill.

Businesses that have an economic moat typically fall into the "wonderful" category and are superior because they have certain traits that help them succeed against rivals in the industry over the long term. There are two key factors supporting Amex's moat. For one, the American Express brand is extremely powerful, positioned as a premium offering in the credit card space.

As a result of its top-notch rewards and perks, as well as valuable partnerships, the company is able to charge high annual fees that increase over time. This attracts consumers with above-normal spending power. Amex's net charge-off rate is usually lower than its peers, showcasing its adeptness at managing credit risk and the ability of its cardholders to make their payments on time.

Because it's a two-sided platform having a direct relationship with both merchants and individuals, a network effect also plays a role. As cardholders increase, it provides merchants with a larger pool of potential customers and opportunities to generate greater revenue. And with more merchant acceptance locations, having an Amex credit card in your wallet adds utility for individuals.

Buy the dip

American Express isn't going to impress investors with its monster growth. Instead, the business posts durable gains. It benefits generally from increasing economic activity and greater consumer spending over the long run. Add in the fact that it's bringing on more of the younger demographic as its customers, and there's reason to be optimistic that the steady rise will continue.

In the past five years, revenue rose at a compound annual rate of 8.7%. Diluted earnings per share (EPS) climbed at a yearly pace of 11.9%. The leadership team has done a good job returning capital to shareholders in the form of buybacks and dividends, boosting returns.

According to Wall Street consensus analyst estimates, EPS is projected to increase at an annualized clip of 14.5% over the next three years. This seems like a reasonable outlook through the rest of the decade. Investors can expect this bottom-line growth to fuel the stock.

Valuation is another driver to keep in mind. When Amex shares traded at their peak in January, the valuation wasn't that compelling. The stock was being sold by Mr. Market at a forward P/E ratio of 21.2.

With shares now down 24% from their record, my view has shifted from cautious to opportunistic. The valuation now looks very attractive at about 16 times forward earnings. Assuming this multiple gets to 20 by 2030, and that adds 25% upside.

But even if the valuation stays constant, which seems unlikely, the fact that EPS is projected to double in the next five years is enough to result in a 100% gain on the stock. If you're looking for a solid opportunity in this tumultuous market, buying Amex shares today could be exactly what your portfolio needs.

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

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American Express is an advertising partner of Motley Fool Money. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.