Why You Should Buy This Bank Amid Negative Sector Outlook
Lennox is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On the face of it, JPMorgan Chase (NYSE: JPM) is a risky investment. Not only is it trading intimately close to its 52-week high of $55.90, but it is also on the center stage of a possible industry-wide pullback. Incertitude has shrouded the banking sector following the Fed’s announcement on impending cutbacks to economic aid. A 2011 audit of the Federal Reserve reveals that economic aid, which was instituted post-2008 to correct the negative implications of the financial crisis, totaled $16 trillion at the time. As of now, this figure is set to have increased and Fed Chairman Ben Bernanke believes that it’s high time the government pulled out and let the economy run itself.
If the Fed-driven fears hold, an investor exodus will most definitely hit the banking sector. Does this mean that you should join the crowd? No it doesn’t. If you embrace a long-term buy-and-hold strategy, this is the time to establish a position in, or add more of JPMorgan to your portfolio. Despite trading close to its 52-week high, JPMorgan’s prospects in little-discussed areas suggest that it could soon break its banks and venture into an entirely new share price territory.
Housing rebound presents alternative growth path
Behind the doomsday headlines surrounding the banking sector, interesting developments are happening. While it’s not news that the housing sector is rebounding, a good number of people seem to be oblivious to the rate at which it is rebounding and, further still, the implications that this uptrend will have on banks.
The National Association of Realtors offers that existing home sales in May hit highs not seen since 2009, increasing 12.9% year-on-year. This remarkable improvement was also accompanied by overall improvement in other key metrics in the housing sector.
The banking sector has gained immensely from the ripple effect of the housing rebound. JPMorgan’s competitor Bank of America (NYSE: BAC), which is incidentally trying to regain its market share in the mortgage market, underwrote $24 billion in home loans for the first three months of the year. This, however, waned in comparison to JPMorgan, which originated $53 billion in mortgages during the same period.
As far as the housing rebound goes, Bank of America is creating a prime leeway for its competitors. The bank has been pulled into a loan modification lawsuit. The lawsuit involves the bank’s former employees and a group of homeowners who allege that their requests for loan modifications under the Federal Home Affordable Modification Program were turned down, for the most part fraudulently. The testimonies under the case are outrageous. Former bank employees offer that they were under orders from above to lie through their teeth to unsuspecting clients.
While Citigroup (NYSE: C) and JPMorgan were found to have failed on at least 12 benchmarks instituted to assess banks’ progress on settlements, they accepted their mistakes and vowed to make amends. Bank of America, however, remains mum--even in the face of the ongoing legal brawl. While this may have a negative effect on Bank of America’s public image, it is on the flipside a key opportunity for JPMorgan to gnaw into Bank of America’s mortgage market; especially now that the housing sector is rebounding.
China sneezes, Africa catches a cold, America rushes in just in time
Africa is no longer the world’s tip jar, but rather a key growth pillar. Different countries are jostling for opportunities in the continent, most notably China. The Asian country, which is the world’s second largest economy, is currently the biggest investor in Africa. Going by a new database from AidData, China infused $260 billion in Africa between 2000 and 2011 in investment and aid--$34 billion in 2011 alone, reports Africa Business.
While this relationship is nothing but beneficial for Africa, there are very many dangers gathering on the horizon. If China sneezes, Africa catches a cold. Or better yet; if China catches a bullet, Africa bleeds. And from recent developments, China seems to be catching quite a number of bullets. Not only are there looming cash concerns, as shown by Chinese banks' recent reluctance to lend to each other, but there are also a lot of concerns over the debt issue. Earlier in the year, Zhang Kew Hoc, a senior Chinese auditor, intimated that the Chinese debt situation could be a prelude to a crisis bigger than the U.S 2008 housing crash. As it is, China’s growth is tracking downwards at around 7%, much lower than the double digit growth that was witnessed in the past decade. In the event that China plateaus--and the signs are there--Africa is very likely to turn to the U.S.
American banks like JPMorgan and Citigroup have already set the stage for this. In one move, JPMorgan last year invested in Africa’s fastest growing e-commerce retailer Jumia and Zando. And recently, the bank received a nod from the Central Bank of Kenya to open a representative office in the country. JPMorgan’s plan for Africa is to leverage its strong cash position to land big project and large infrastructure financing, something that has been an issue for smaller banks in the continent. In Kenya for instance, Kenya Commercial Bank, the country’s largest bank, can only lend a maximum $125 million. The situation may be worse in many other African countries. As such, JPMorgan’s current position in the continent is a great opportunity for future double digit growth, especially if China’s stance on the continent softens in favor of its own internal economic issues.
Citigroup touts winning the Fed’s stress test, signaling its ability to weather another financial crisis similar to or worse than the 2008 one. In addition, Citigroup is cutting back on costs and improving its cash position as shown by the CEO’s early-year announcement to follow through on 11,000 layoffs. Nonetheless, this alone is not reason to buy it over JPMorgan. Going by Citigroup’s PE ratio of 17.85, it is significantly more expensive when compared to JPMorgan, which has a PE ratio of 9.39. JPMorgan is in fact even cheaper than Bank of America, which has a punishingly high PE ratio of 40.48.
With the greatest valuation among its peers, a strong cash position and burgeoning growth prospects, JPMorgan remains a strong long-term buy, even in the face of the current Fed-driven fears.
Many investors are scared about investing in big banking stocks after the crash, but the sector has one notable stand out. In a sea of mismanaged and dangerous peers, it stands out as The Only Big Bank Built To Last. You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.
Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co.. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!