Should You Forget Bank of America and Buy This Magnificent Bank Stock Instead?

Bank of America (BAC 0.03%) has been one of Warren Buffett’s favorite stocks for some time. He first took a position in 2007, and has since become a sizeable part of the total.

He’s made headlines in recent months for selling a percentage of his position in Bank of America, which might lead investors to think he’s not a big fan these days. However, this would be a wrong assumption. Bank of America shares account for another 10% of Berkshire Hathawayhis total portfolio — the third largest position.

But does that mean it’s not such a great value for new investors? Investors on the fence or looking for a great banking stock to add to their portfolio may want to consider American Express (AXP 0.86%) instead.

Overtaking Bank of America for second largest

Buffett has owned American Express stock since 1995, making it the second-longest holding, just behind Coca cola. These are two stocks that Buffett said he would never sell. he added Apple to that recent status and sold much of it soon after, but kept every share of Coca-Cola and American Express it ever bought.

Since BofA’s recent selling streak, American Express has overtaken it as the second largest position in Berkshire Hathaway’s portfolio. It’s currently 13.1%, and while that’s partly because Buffett sold BofA stock, it’s also because American Express shares are outperforming BofA right now.

More than just a credit card company

People know American Express for its credit cards, but it has expanded into a much bigger business. Most importantly, it is a bank and everything is online. So while the name may still conjure up people in business suits, the company is much more attuned to the needs of a younger generation of users looking for digital financial services. It is also heavily invested in small business solutions and the merchant side of the coin (or credit card).

The banking side of the business plays a bigger role than simply expanding the company’s service platform. American Express has a closed-loop credit card network, meaning it funds its own credit cards. Networks like Visa and MasterCard partners with banks such as Bank of America, which finance the credit for the purchase, while Visa and Mastercard provide the network through which the purchase and exchange of money takes place.

American Express does it in one fell swoop, and that comes with several benefits. The company is cash-rich (which is one of the reasons Buffett likes it), has more control over its business, and has multiple segments that work together and provide varied revenue streams—another characteristic Buffett looks for in -a great deal.

More than a bank

At the same time, it has several advantages over a standard bank stock. It benefits from higher expenses and the different parts of its business balance each other out under pressure.

They also target an affluent clientele who can part with the high fees they charge for the privilege of using their fee-based cards and getting the rewards and perks that come with them. Note that not all American Express cards charge annual fees, making them more accessible to a larger population and bringing more users into its ecosystem.

So while it has increased its loss provisions in the current economic conditions, it has seen strong growth, including profits. It reported a 44% year-over-year increase in net income in the second quarter, or 21% excluding the proceeds of a sale. He invests in new marketing campaigns, but still feels he doesn’t need that investment income. So that’s being passed on to raise full-year earnings per share (EPS) guidance from about $12.90 to $13.50.

Reliable and growing

American Express isn’t always a market-beating stock and may not appeal to growth investors. However, if you are looking for a bank stock, the goal is usually related to the value it provides. American Express is a solid bank stock that should grow over time with low risk. It also pays a dividend yielding 0.96% at the current price.

It’s lower than usual because American Express stock is on fire — up 46% this year, more than double S&P 500. Even value investors are benefiting from American Express’s top performance right now with high growth.