One of the most underperforming sectors over the last year of this market rally has been the financials. This underperformance has accelerated over the last few months. Well known financial names such as Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC) have behaved poorly over the last few months. This does not bode well for economic growth going forward or for the market overall, in my opinion. However, it does present an opportunity to pick up the gold standard of banks; JPMorgan (NYSE:JPM), at a very reasonable price.
JPMorgan Chase & Co., a financial holding company, provides various financial services worldwide. Its Investment Bank segment provides various investment banking products and services, including advising on corporate strategy and structure, capital-raising in equity and debt markets, risk management, market-making in cash securities and derivative instruments, prime brokerage, and research services serving corporations, financial institutions, governments, and institutional investors. The company’s Commercial Banking segment provides lending, treasury, investment banking, and asset management services to corporations, municipalities, financial institutions, and not-for-profit entities.
JPM sells at a little more than 8.5 times 2011’s projected earnings and less than 8 times 2012’s consensus earnings. It has a PEG ratio of 1 and has a dividend yield of 2.3%. It is selling at the bottom quarter of its five year valuation range based on P/E and P/CF.
Five positive trends and catalysts
There are several things that recommend a position in JP Morgan:
1. It arguably has the most respected CEO in the financial services business, one who has been mentioned many times as a candidate for U.S. Treasury Secretary. Jamie Dimon has done a great job navigating the firm through the financial crisis as well as picking up assets on the cheap
2. As it continues to repair its balance sheet, JPMorgan should have ample flexibility to eventually restore its dividend level to pre-crisis levels; which would be roughly double the current rate
3. JPM has significantly beats earnings estimates over the last four quarters. In addition, earnings estimates for 2011 and 2012 have been raised consistently over the last ninety days even as the stock price has drifted lower
4. JPM has a very strong balance sheet and will benefit greatly from the reserve drawdown in 2011 and 2012 given the slowing growth in its problem assets and the fact it was better reserved than its peers to start with
5. JPM is showing strong investment banking results. The investment bank and trading operations have consistently performed above expectations over the last few quarters.
If you believe the banking system will eventually recover and prosper, JPM has to be in your portfolio, as it is widely recognized as the best run megabank in the industry and its valuations are compelling. A conservative and more reasonable valuation would be at least 9-10 times next year’s projected earnings of $5.66 or $51 to $57 a share. BUY
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JPM over the next 72 hours.