JPMorgan: Why You Should Hold Instead Of Sell
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JPMorgan Chase (NYSE: JPM) investors now have another reason to dump its stock, despite the company's reporting a profit of $5 billion for the second quarter of 2012. A recent report from The New York Times revealed that traders may have downplayed the losses of its recent London Whale blunder. The losses now stand at $5.8 billion, and could reach as high as $7 billion. Losses from the London office stand at $4.4 billion for the second quarter, up from the $2 billion originally stated. The bank said it would now have to restate its first quarter results.
JPMorgan stock is down over 20% from its 2012 peak in April and is down 15% from where it was at this time last year. That's actually not so bad. Investors are sticking with the company as it offers a $0.30 dividend and a yield of 3.50%. Its EPS is a solid 4.50. There's still a lot still to like here. As such, I recommend waiting on JPMorgan. The sting of its loss will probably prevent it from making any tremendous growth this year, but once that smoke clears, it could be in for a good period of growth.
This most recent misstep by JPMorgan has only added fuel to the fire in the discussions regarding how much regulation is needed for the investments of big banks. It does not help that Moody's, the highly regarded credit rating agency, downgraded the credit rating for big banking firms like Citigroup (NYSE: C), Goldman Sachs Group (GS), and Bank of America (NYSE: BAC). All of this negative action in the world of investment banking is only making it harder to prosper if you are JPMorgan.
With that being said, Jim Cramer has stated publicly that he thinks the degree to which JPMorgan will suffer from their major trading error may very well have been exaggerated simply to boost interest with exciting headlines. This is not an uncommon tactic used by the media, and Cramer's insight reminds us that we should take reporting with a grain of salt, particularly when they are making predictions about the future and estimates of the worst-case scenarios. It is likely that the negative effects of this bad trade on the part of JPMorgan will result in an oversell, which would create a buying opportunity for people who realize that outside of this bad trade, JPMorgan is still a very solid company.
On the bright side for JPMorgan, it is not alone in its current predicament. Many of the companies in the financial sector are experiencing their own difficulties, which keeps JPMorgan from falling behind in the competition for business. After the Supreme Court recently ruled in favor of President Obama's health care bill, the stock prices of Bank of America and Citigroup accompanied that of JPMorgan in a downward slide. In London, Barclays (BCS) is experiencing its own issues with management dropping like flies to avoid the heat of the recent rate-rigging scandal. It seems financial firms around the world are having a rough time.
But if we look beyond this recent negative news, there are many things that JPMorgan still has going for it. For one, it still has Jamie Dimon, the 2002 CEO of the year, at the helm. In spite of the recent trading mistake, it is largely agreed that Dimon is an excellent CEO and risk manager, and as such should continue to have a positive effect on the company and its stock price. Additionally, though it may be portrayed as a negative thing from the media, the simple fact is that the subsidies received by "too big to fail" institutions from the government pose a large advantage that will inevitably result in more business success in the future. The media may argue that this is an unfair advantage when businesses that are too big to fail receive preferred rates, but fairness isn't always a big factor in stock price. The bottom line always is a big factor, and that is what will be enhanced by receiving these preferred rates. In fact, it is reported that Citigroup saved approximately $50 billion between 2007 and 2010. JPMorgan saved less than that, but still a sizable chunk. Ultimately, the thing to take away from this news is that companies like JPMorgan have the deck stacked in their favor, and over the long term that will benefit investors.
More good news for JPMorgan is its ability to out-perform its competitors underwriting corporate bonds. While JPMorgan is continually leading the pack in this facet of its business, the likes of Bank of America and Citigroup are falling behind. In the first half of 2012, JPMorgan led the industry, while Bank of America dropped to third and Citigroup held the number two spot. JPMorgan's massive amounts of capital give it an advantage that will continue to keep it on top, which is more positive news for the company and for investors. Meanwhile, the likes of Citigroup and Bank of America can continue to fight over second place.
Despite the storm brewing over its derivatives losses, JPMorgan certainly has some things going for it; wait out the storm and there could be sunshine here for the long-term. Its 52-week high is $46.49 and I don't know if it can reach that number quickly, but I am certain in the future it will see that number again.
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