J.P. Morgan Remains a Screaming Buy
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Large financials were given two hand-wrapped gifts last week in the forms of the ECB’s “Monetary Outright Transactions” program and a U.S. jobs report that removed the last obstacle in the Federal Reserve’s path to more quantitative easing. Financial stocks, which began climbing on the European news, surged Friday when nonfarm payrolls were reported well below consensus estimates – an addition of 97k jobs rather than the 130k expected. Amongst these stocks, J.P. Morgan Chase (NYSE: JPM) remains the most attractive based on valuation, lagging year-to-date performance and a mispricing due to the “whale trade.”
The London Whale
Before one can have a meaningful discussion about J.P. Morgan, the ongoing issue of the London whale trade must be addressed. Since the loss from the trade was first announced, it has lived up to CEO Jamie Dimon’s original assessment – “it is a bit of a tempest in a teapot.” While the trade appears to have cost the firm roughly $5.6 billion in losses, that number is only meaningful in the proper context. During the same period in which the loss occurred, J.P Morgan posted very positive financial results. Secondly, the firm runs a portfolio of about $150 billion, meaning that the trade represents a loss of less than 4%. While that is a significant amount of money, on a percentage basis, it is hardly a crisis for professional traders.
The last issue which has been completely glossed over is the fact that the trade represented a hedge against various other positions. J.P. Morgan, and more specifically Mr. Dimon, understands that “explaining” will look like trying to excuse the loss, not to mention that professional money managers are not in the habit of dissecting their trading strategies in the public eye. The loss was significant, but the stock continues to be unjustly punished.
Finally, Bloomberg reported last Thursday that the firm and the trade have become the focus by a probe by a U.S. Senate panel. This cannot come as a shock in the midst of an election year, but as long as the financial wizards in the U.S. Congress are on the case, what could go wrong? The real impact of these nagging distractions is that the stock remains a screaming buy at current levels.
On a valuation basis, J.P. Morgan continues to be the cheapest stock amongst its peers, trading a multiple of 9.1. Bank of America (NYSE: BAC) is trading at 9.7, Wells Fargo (NYSE: WFC) at 11.6 and Goldman Sachs (NYSE: GS) at 17.4. It is despite, not because of, lagging year-to-date performance that J.P. Morgan has maintained its attractive valuation. Bank of America has been the strongest Dow component so far this year, up over 50% (see chart); J.P. Morgan has been the weakest of the above group, up only 12.4%. Wells Fargo, with its high exposure to the mortgage market, should benefit from the improving climate for banks, but continued employment issues are a net negative. Goldman Sachs continues to perform, but it relative valuation is the least favorable.
Focusing on J.P. Morgan relative to Bank of America, it is natural to wonder why lagging performance, increased scrutiny and similar P/E’s make J.P. Morgan the better choice. The risk you face with Bank of America is that the stock has run so far, that it may fall under its own weight at some point. While the overall trajectory of the stock is positive, stocks rarely follow straight paths higher. The other concern with Bank of America is that it still faces struggles with its lingering exposure to Countrywide Financial. The stock has been able to climb this much because it had fallen that far. J.P Morgan has remained a steady option throughout.
Tipping the Scales
For any remaining skeptics, I would suggest considering the relative dividend yields of these stocks. J.P. Morgan yields an impressive 3.1%, while Bank of America pays only 0.5%, Well Fargo pays 2.5% and Goldman pays 1.6%. When the income element is added to the mix, J.P. Morgan is not only the most attractive major financial stock, it is one of the more appealing stocks available. At current levels, this stock is an absolute buy.
To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America’s prospects, including three reasons to buy and three reasons to sell. Just click here to get access.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group and Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.