Thursday proved to be a good day for my portfolio as three of my core holdings (JP Morgan, Conoco Phillips and Google) reported news that should drive the stocks higher in the weeks ahead.
JP Morgan (JPM) reported much better than expected quarterly earnings. The company reported earnings of $1.27 a share, much higher than consensus both on earnings and revenues per share. The better-than-expected performance was driven by investment banking, where JP Morgan has the highest global investment fees of any bank year to day. A decrease in charge-offs and an uptick in commercial lending also supported a robust report. JP Morgan now sells for around 8 times this year’s projected earnings (which will be revised up based on this latest earnings report). JP Morgan is now even more undervalued than it was when I first wrote about it in May and added it to my portfolio. I would look for JP Morgan to trade in the mid to high forties by the end of the year, even with mild growth in the economy.
Conoco Phillips (COP) followed the recent lead of Marathon Oil (MRO) and announced it will split into two companies. These two businesses, Refining and E&P, should allow both companies to be more focused on core competencies going forward. More importantly, it should allow COP to unlock significant shareholder value as it is rewarded with a higher multiple from Wall Street. This presents a great opportunity to pick up Conoco Phillips shares now. Marathon gained 30% after it announced its split off of its refinery business. I don’t think Conoco will quite get that sort of pop in the short term, but 10-15% over the next few months seems reasonable given its low valuation and other positive factors. Conoco is a strong buy here.
Google (GOOG) crushed earnings estimates after hours on Thursday. It produced over $9 billion in revenues for the quarter, far exceeding consensus estimates of $8.6B. Earnings per share were $8.74 which easily beat Street estimates of $7.86. Google+1 has over 10mm users, which shows the company might finally successfully challenge Facebook in social media, which would be a game changer. In addition, this might be the event that proves a watershed moment for social media firm’s excessive valuation. If an established firm like Google can challenge the social media king Facebook, what does that say about other social media companies that have lesser moats? I would be particularly concerned if I was Groupon’s management, given the low barrier of entry in that business, a growing competitor already in LivingSocial and the possibility of increasing competition from larger tech companies with the resources to make a large entry into their market (Google Wallets/Events anyone?)
Google had a huge pop at the open Friday that took Google shares close to $600 a share. I plan to hold on to my shares as I think the company is a long term winner. However, I would not add to my position until the euphoria (and short covering) from this strong earnings report fades. I will be looking to add to my position if the overall market sells off over the summer and brings Google down with the rest of the tech sector.
Disclosure: I am long JPM, GOOG, COP.