With JP Morgan Chase (JPM) down almost 20% off its highs, I just re-initiated a position back into this high quality financial behemoth. My decision was due to its strong fundamentals, an interesting statement from CEO Jamie Dimon, and a mild technical indicator.
Last week, Chase CEO Jamie Dimon had some interesting things to say at a conference in New York. He said that JPM share repurchase plan has been going faster than anticipated. While I'm not usually a fan of share buybacks, let's see what Dimon had to say.
"I don't buy this argument that when you buy back stock, you are returning cash to shareholders," Dimon said, saying he would rather take care of remaining shareholders by repurchasing stock when it is relatively cheap. "As the stock goes down more ... obviously we have been buying."
He also added that they'll be adding to their $8 billion buyback plan when it is complete if regulators allow.
So if I don't generally like buybacks and Dimon doesn't like them, why am I interested in this statement? Because it really shows just how disciplined Dimon is and that JPM is undervalued.
Dimon realizes that this shareholder tool is one to be used only in the right circumstances. The problem with share repurchases is that most corporations fail to use them effectively, often using them at the wrong time, or to simulate earnings growth that isn't coming organically [ergo Pfizer (PFE)]. This can lead to destruction of value, as the shares are purchased too high. I often point to Bank of America (BAC) and Citigroup (C) buying back billions of dollars in shares in 2006, only to have to re-issue that equity at pennies on the dollar in 2009.
That's what Dimon wants to avoid and it shows his prudence. So if Dimon, who only uses this shareholder tool sparingly, is buying, not only is it probably an effective use of spare cash, it indicates that JPM is undervalued at these levels. Undervalued not by some CEO trying to prop up a no growth share price, but by one of the sharpest financial minds in the business.
Furthermore, it shows me what I've always believed: that Dimon is one of the best CEOs on Wall Street. He values the shareholders, but won't put the company at risk to please them. Management talent is something I value very highly and I often turn down companies with excellent competitive advantages due to bad management [ergo Johnson and Johnson (JNJ)].
Combine this leadership skill with Chase's self proclaimed “Fortress Balance Sheet” (7.3% Tier 1 common ratio under Basel III ), improving US loan and credit card quality, diversified products and geographical positioning, an outperforming investment bank, massive loan deposits and accommodating Federal Reserve policy and you have the makings of a great investment. It's trading at a paltry 9X earnings and slightly under Book Value. Target prices include Standard & Poors at $52 and Credit Suisse at $58. This would amount to some 30% upside off today's $40 and change.
Also, if some of you have read my profile, you'll notice I like to pull the trigger on investments when there's some technical indicator. There are signs that JP Morgan is nearing a bottom, with the RSI finally dipping into "oversold" range today and the price at the bottom of its Bollinger Band. Additionally, it appears JPM ran up to a double top around $48 which broke support at $44. This stock chart formation often then indicates a drop to a position at the difference of the two ($4), which would be around $40.
In summary, JPM at book value levels is almost a no brainer investment, with its best in class management, powerhouse balance sheet and strong banking leadership. It should be a core holding in your portfolio and this is a great time to initiate that position or add to an existing one.
Disclosure: I am long JPM.