Investing successfully requires one to throttle one's emotions. While fear and greed are the two most common, hate is also an emotion that can blind one to opportunity. Hate can cause one to dismiss facts that are clear; and when gathered in mass, can create a distortion for a potential profit anomaly.
Greed, Corruption, And Ruinous Bankers
It's no secret that financial favors were given to financial players over the last three years. Because of the timely gifts, the US financial services sector is a sector that is hated more than even big oil. And when you think of who to hate most, Goldman Sachs (GS) and JPMorgan Chase (JPM) are easily numbers 1 and 2.
If business is a dog-eat-dog world, then both Goldman and JPMorgan are the greatest of Great Danes. The chatter on the street is filled with disgust for both, and sensational stories circulate daily:
Goldman runs both the Fed and Treasury, while JP Morgan manipulates gold and silver markets. And of course, both front-run their clients. They write our nations laws, funnel their talent to government posts, and bury both customers and competitors alike that threaten their franchise.
Ordinary people cheer any of their failures, and many investors shy away due to the constant turmoil they always seem be involved with.
Management
While the stories above may or may not be true, one truth is widely acknowledged; Goldman and J Morgan are the best managed financial companies in the world. Ask anyone on the street, Goldman and JPMorgan are the envy of their peers. They hire the best and brightest, pay the most to "talent," set the market opinions, and lead the herd in the direction they choose to move.
Each has roots set so deep in banking that a mere mention of association lends to instant credibility. In a world where reputation and strength are the two most coveted traits for business partners, both Goldman And JP Morgan have reputations that are priceless. A franchise has value beyond the assets and liabilities, and in the case of these two titans, the value is worth more than the tens of billions analysts would normally quantify. We believe that significant opportunity lies ahead for those who can see the pricelessness of each company's franchise, especially when compared against each company's stripped-down stock valuation.
Fundamentals
- Both companies trade at essentially tangible book value. Which means the market is looking solely at assets minus liabilities, and dismissing franchise value and future earnings potential.
- Both are trading 2012 PE ratios of 7x, which is an enormous discount to the S&P 500 (SPY).
- Both have recently begun to buy back stock and return capital through increased dividends.
- Each lays claim to number one in investment banking; and since they are so close, we would argue they are co-best in investment banking/mergers and acquisitions.
JPM ($36.08)
Market Cap $140B
52-week range $33.69 - $48.36
Tangible Book Value: $31.97
PE (est) 7.2x for 2011, 6.4x for 2012
Dividend Yield: 2.8%
Notes: Repurchased $3.5B of stock in Q2
GS ($116.35)
Market Cap $60B
52-week range $110.04 - $175.34
Tangible Book Value: $121.60
PE (est) 10x for 2011, 7x for 2012
Dividend Yield: 1.2%
Notes: Repurchased $1.5B of stock in Q2. As recently as July 18, Board approved another 75 million share repurchase (total authorization 90 million shares or roughly 20% of the 527 million shares outstanding).
Look Past The Hate
While we acknowledge that both companies are piranhas and work the system to their benefit; we also believe that they possess the management, infrastructure, and reputation to come out on top. We believe that both should trade at premium market multiples. Our mid-term price targets (12-24mos) are $200 for GS and $60 for JPM.
For investors who can look past the hate, a tremendous opportunity to profit is directly in view. With Goldman Sachs and JPMorgan Chase trading at tangible book and at 7x 2012 earnings, it's time buy 'em because you can't beat 'em.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in JPM, GS over the next 72 hours.
