Morningstar calls Discover Financial Services (NYSE:DFS) the “poor man’s American Express Company (NYSE:AXP)” because it targets middle class individuals. If the news during the financial crisis and the last presidential election didn’t make it evident, middle class citizens make up a vast portion of the U.S., even though the term is used more broadly than ever.
As the economy slowly recovers, Discover Financial Services (NYSE:DFS) is chugging along because it relies on credit card loans and personal loans for the majority of its profits. Second-quarter earnings reported the former up 5% and the latter up 22%. With net profit at $602 million, the company is far from a “poor man.”
When investors are searching for safer investments in the financial sector, they may be hesitant of lenders because delinquency risk can hinder profits. However, Discover Financial Services (NYSE:DFS)’s customers have proved diligent because late loan payments are sitting at just 1.5 percent. If customers stay this conservative while the stock remains at a forward P/E less than 10, it may be time to join the club.
Don’t forget the VIP
As mentioned earlier, some consumers are struggling to pay off debt, but customers of American Express Company (NYSE:AXP) do not have this problem. The larger closed-loop network and lenders relies more on making money off of customer fees rather than loans. Along with being a symbol of high class, American Express Company (NYSE:AXP) offers exceptional customer service and pairs with successful brands such as Delta Airlines and, more importantly in my book, Costco.
American Express Company (NYSE:AXP) generates annual sales of almost $34 billion, and its wholesale goods partner will carry it when households get stingier. People love to buy in bulk in an effort to save in the long run, and the AmEx/Costco card has been a popular choice there for almost 15 years.
If you apply the same thought process to your investments, the stock may have room to grow, even being up over 25% in 2013. Ignore the “end of the bull run” cries and focus on the average earnings growth of over 5% over the past decade. There are new kids on the block, but this credit card champion isn’t slowing down any time soon.
The article 3 Stocks Poised to Continue Rising originally appeared on Fool.com and is written by Kyle Vaughan.
Kyle Vaughan has no position in any stocks mentioned. The Motley Fool recommends American Express, Costco Wholesale, MasterCard, and Visa. The Motley Fool owns shares of Costco Wholesale, MasterCard, and Visa.
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