This coming week, the earnings season begins in earnest with JPMorgan (JPM) announcing before the open on Friday, April 12th. The company has an enviable record of consistently beating expectations - 11 out of the last 12 quarters, and over the past year, they overachieved by an average of 27%.
While this record is exceptional, the interesting thing to me is how the market has reacted to each announcement. Over the past four announcements, the stock has actually fallen half the time. The only exception was in July when JPMorgan exceeded by a whopping 59% and the stock moved $2.03 higher (this was an unusual quarter because expectations were dramatically reduced due to the London whale disclosure in May). For the last two quarters, the stock has fluctuated by less than $.50 (once up, once down) on the day following the announcement, in spite of the company exceeding expectations by 17% each quarter.
Check out the chart for the last year:
For the last two earnings period, the stock moved steadily higher for the entire month leading up to the announcement. This suggests a time of rising expectations, yet when those expectations were achieved, nothing much happened because the market expected just that.
This time around, the pattern is just the opposite. Over the last two weeks, the stock has fallen by 6% from its high of $51 reached on March 14th. Part of the reason might be the recent public rehashing of the London whale event which occurred in May 2012 (see the huge drop in the stock price at that time); but that is old news and unlikely to affect current earnings. Regardless of the real reason for the stock's recent weakness, it suggests a time of lowered expectations, and if earnings exceed once again, the stock might be in for a big move to the upside.
There are a lot of things to like about JPM. Notably, a forward p/e of 8.8 while predicted growth is conservatively pegged at 6%, a 3.2% dividend since the latest increase from $.30 to $.38, and $6 billion of stock authorized buy-backs for the next nine months (enough to buy back about 120 million shares, or almost 3% of the 3.8 billion outstanding).
For a comprehensive (and bullish) look at the company's outlook, check out the Seeking Alpha article Picking Up JPMorgan On The Dip. I won't repeat all that good analysis here.
Bottom line, it looks like it is highly unlikely that the stock will drop significantly after this week's announcement, and there is a good possibility of a higher stock price. Last Friday there was an indication that the stock is already headed higher when it rose almost 1% while the market was lower across the board after the dismal jobs report.
Since I am basically an options guy, my plan is to buy May - Apr 2 calendar spreads at the 48 and 49 strikes and some extra April 50 calls (on the cheap, for less than $.10) in case there is a big up move. These positions should result in at least a 20% gain for the day if the stock holds steady or moves up as I expect it will. Since IV of the May options is only 22 (not much higher than is typical in a non-announcement month), I don't expect much of a collapse in May option prices after the announcement.
In any event, either with options or the outright purchase of the stock, in my opinion, this seems to be a good time to get on the JPM bandwagon.