Valuation Reveals JPMorgan Still Strong In Long Run
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In a move that should surprise few, the announcement from JPMorgan's (NYSE: JPM) CEO Jamie Dimon that the current losses from the much heralded 'whale trade' were, in fact, in the realm of $5.8 billion, sent the stock soaring in early trading on Friday the 13th. While the superstitious will chalk it up to the unlucky date causing strange occurrences, this is not a purely fair characterization of events. What the news does, effectively, is put into perspective that both timing and context are as important to how the market digests news as the news itself. In May, when the bad trade was disclosed in an unscheduled conference call, the report of a $2 billion loss was sufficient to send investors into a panic, hurting both the stock and the reputation of the company and its CEO. Both have fully recovered.
Putting the News in Context
While advocating buying this stock, it is important to understand the mechanics of the news that served as a catalyst for the latest price spike. In other words, one must explain why news of a $2 billion dollar loss was a negative, but news of a three times larger loss was a positive. Taking as a basic premise of trading that unknowns are seen as negatives, the initial loss was cause for alarm by many because they did not know where the damage might stop. Leaving aside the fact that at $2 billion, the loss was, in reality, no more than a bad trading day for a firm that manages over $150 billion in assets, it was the uncertainty that led the stock to be penalized as dramatically as it was.
The most recent report of the mounting loss was accompanied by the announcement that JPMorgan had, nonetheless, earned significant profits in the quarter. Warren Buffet is quoted as saying, "it is a whole lot of money but it's not that significant, relative to JPMorgan." This school of thought looks at the big picture of the trade within context. While others are pinning blame on Mr. Dimon, stating that he failed in his responsibility to maintain proper corporate governance and that he should be replaced, the overall effect of the trade has been contained very effectively. Mr. Dimon has broken down the loss between approximately $4.4 billion last year, another $1.4 billion this year, and a total loss, if conditions worsen, of $7.5 billion. The disclosure was enough for the market, which immediately drove the stock up $1.50 per share to around $36 per share.
Overall, the impact of a positive quarter, when combined with the market's belief that the losses have been limited, is what sets this most recent news in a positive light. The ability of investors to look to the size of the company's profits, despite the fact that it was forced to take so sizable a loss, seems to be offering the perspective that had been lacking. Mr. Dimon's critics remain fervent that he is to blame for the loss, but what the continuing coverage of the event continues to demonstrate is that Mr. Dimon is both reasonable and trustworthy. The lack of these two traits has been sold to the public as hallmarks of Wall Street, so the ability to buck this trend continues to put Mr. Dimon in a favorable light.
JPMorgan was not the only stock to react well to the news. Wells Fargo (NYSE: WFC) was up 1.8% after the announcement, Citigroup (NYSE: C) was up 2.9%, Bank of America (NYSE: BAC) was up 2.5% and Goldman Sachs (NYSE: GS) climbed by 3%. To put these figures into perspective, the relative value of each company, as measured by its price-to-earnings ratio, should be considered. JPMorgan is currently trading at a trailing twelve month P/E ratio of 8.0 relative to 11.7 for Wells Fargo, 7.5 for Citigroup, a lack of a measurable P/E for Bank of America, and 14.4 for Goldman Sachs.
This relative valuation should put the real position of the stock into perspective, but some remain skeptical. Anton Schutz of Mendon Capital Advisors, who manages a large portfolio of financial stocks, including JPMorgan, was quoted as saying "I'm not buying here. They've got to put up a whole lot of clean quarters to regain the status they had, to show they really deserve to trade higher than everyone else. Every shareholder was disappointed with them. The bloom may not be off the rose, but a couple of petals have fallen off." With respect to Mr. Schutz, at current levels the stock is not really trading higher than its peers. Given this is only one of several possible measures that can be used to evaluate the stock, the underlying point is that the stock is in the thick of things in terms of financial metrics. Stock picking is not limited to simply comparing metrics and rolling the dice, but the intangibles still favor JPMorgan. Mr. Dimon's candor in handling this matter seems to be only outpaced by those who would crucify him.
Overall, while the current price spike makes the stock less attractive than it was at slightly lower levels, it remains well positioned for investors looking for a solid long-term value play.
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