Why You Should Be Bullish On JPMorgan Chase

Jul.28.14 | About: JPMorgan Chase (JPM)

Summary

JPMorgan Chase looks like good value right now, with its price to book ratio having scope to increase.

It looks good value relative to sector peer, Bank of New York Mellon, as their respective price to book ratios have diverged by too great an amount.

JPMorgan Chase’s price to book ratio has pulled back and picked up during 2014. This is a trend we have seen before and, as such, we expect further upward momentum.

JPMorgan Chase Price to Book Ratio

As you can see from the chart below, JPMorgan Chase's (NYSE:JPM) price to book ratio has ranged between 0.988 and 1.073 over the last three months. Indeed, it showed strength during the latter part of May and first part of June as it moved upwards from the low to the high of its three month range, before falling back to just over 1 in mid-July. Today, it stands at 1.068, which is at the upper end of its three month range.

JPM Price to Book Value Chart

JPM Price to Book Value data by YCharts

Looking beyond three months, however, we can see that JPMorgan Chase's price to book ratio has been higher. Indeed, over the last year (as shown below), it has reached highs of 1.16 after being at around 0.96 less than twelve months ago. Indeed, the last three months have shown a pickup in the bank's price to book ratio, with it now sitting at a three month high.

JPM Price to Book Value Chart

JPM Price to Book Value data by YCharts

The chart below shows JPMorgan Chase's price to book ratio over the last five years. Here we can see that 2014 has proved to be something of a disappointment, as the bank's price to book ratio has largely faltered after eighteen months of strength between mid-2012 and the end of 2013. In this period, the ratio increased from 0.68 to just under 1.15, which is a gain of 69% in a relatively short space of time.

However, this momentum seems to have ground to a halt during the first part of 2014, as the ratio pulled back (as highlighted in the earlier one year chart). However, going back to the three month chart, there appears to be a pickup in strength in recent months, as JPMorgan Chase's price to book ratio has reached three month highs. Indeed, similar pullbacks and pickups that have occurred in 2014 have taken place previously, with the chart below showing them having taken place in both early and late 2013. Subsequently, the price to book ratio continued its rise in the following months. We think this bodes well for JPMorgan Chase, since the same pattern of pullback and then pickup has been present during 2014 and we believe that a continuation of this pattern could mean that JPMorgan Chase's price to book ratio continues to increase going forward.

JPM Price to Book Value Chart

JPM Price to Book Value data by YCharts

In addition, we feel that JPMorgan Chase's price to book ratio has been left behind by peers such as Bank of New York Mellon (NYSE:BK). Its price to book ratio has not diverged from that of JPMorgan Chase for long periods over the last year and yet there is now a very wide gap between the two banks' price to book ratios. This is shown in the chart below, with Bank of New York Mellon now having a price to book ratio of 1.231 versus 1.068 for JPMorgan Chase.

JPM Price to Book Value Chart

JPM Price to Book Value data by YCharts

The recent period of divergence is shown in more detail below, via the three month chart. Here we can see that at the start of the three month period there was very little difference between the two price to book ratios, but now JPMorgan Chase has a price to book ratio that is 13.2% lower than its sector peer. We feel this is undeserved and, more importantly, returning to the one year chart we can see that periods of divergence do not last for long. As such, we feel that JPMorgan Chase could see its price to book ratio increase going forward as a result of a realization among investors that the gap between its ratio and that of Bank of New York Mellon has simply become too wide.

JPM Price to Book Value Chart

JPM Price to Book Value data by YCharts

Conclusion

We feel that JPMorgan Chase represents good value for money at current price levels. That's because its price to book ratio has pulled back in the early part of 2014, before picking up in recent months. This pattern occurred in the early part of 2013 and the latter part of 2013, with the price to book ratio showing upwards momentum following on from both of these periods. We feel the same could occur going forward, as investors are attracted to recent momentum.

Furthermore, the divergence between the price to book ratios of JPMorgan Chase and Bank of New York Mellon has become far too wide in our view. Indeed, over the last year, divergences in the price to book ratios of the two banks have not lasted for long, so we feel that JPMorgan Chase could see its price to book ratio increase going forward, as investors take note of this apparent mis-valuation and take action to correct it in the form of bidding up the price of JPMorgan Chase.

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.