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J.P. Morgan Securities, a subsidiary of JPMorgan Chase (NYSE:JPM), is among the most profitable investment companies. Last year, the company earned $4.14 billion in advisory fees. The company offers a yield of 3.51%, with a low payout ratio of 17%. While JPM is highly profitable with a net profit margin of 20%, its stock lost almost 30% in 2011. The stock is also trading near half of its book value.

Nevertheless, J.P. Morgan Securities is one of the largest institutional investors in the stock market. The investment titan offers 118 mutual funds managed by money managers. 49 of these funds invest in equity markets (34 U.S. equity funds and 15 international funds). The total size of the U.S.-traded equities managed by J.P. Morgan is approximately $200 billion.

As of 2011 third quarter, JPM fund advisors had a diversified portfolio of equities. Financials constitute 28.13% of the holdings, followed by technology stocks (15.19%) and service (14.08%) companies. According to Edgar Online, J.P. Morgan increased its ownership of 1,792 stocks, while opening 177 new positions in the last quarter. I have examined the 4 big buys and 3 big sells from a fundamental perspective, adding my O-Metrix scores where possible. Here is a fundamental analysis of the 4 big buys and 3 big sells by JPM:

Big Buys

Company Name

Ticker

Shares Held

% Change

% of Portfolio

O-Metrix

SPDR Gold Trust

GLD

11.14 million

109.60%

1.02%

N/A

Kraft Foods

KFT

27.25 million

260%

0.52%

3.61

Google

GOOG

2.60 million

70.70%

0.82%

6.29

Occidental

OXY

19.05 million

48.21%

0.92%

5.57

Big Sells

Exxon Mobil

XOM

44.53 million

-16.31%

1.84%

4.77

Pepsico

PEP

8.76 million

-44.45%

0.31%

3.67

EOG Resources

EOG

2.89 million

-61.39%

0.15%

7.64

Data obtained from Finviz/Morningstar and current as of November 27. You can download O-Metrix calculator here.

Big Buys

SPDR Gold Trust has the largest known gold holding among exchange-traded funds. The fund, which is aimed at replicating the performance of gold, holds near 42 million ounces of gold. I am not surprised to see gold as J.P. Morgan’s biggest buy in the third quarter. Mutual funds have a tendency to lag behind the hedge funds when it comes to timing the market. Legendary hedge fund manager, John Paulson slashed his gold holdings in the third quarter by 35%.

Gold has been viewed as a safe haven during volatile times. However, the recent fluctuations in gold prices showed us that nothing is immune against volatility. Although gold’s year to date performance of 18% is well above the equities, the upward momentum has recently broken. It was a pretty good idea to buy gold in the last decade. However, after returning 400% in the last 10 years, it is too late to buy gold. If you really want to invest in gold, I would recommend cheap gold miners with low P/E ratios that did not perform as well as gold in 2011.

Kraft Foods is another big buy by J.P. Morgan. The investment titan increased its holdings by 260% in the last quarter, and owns 27.25 million shares worth $930 million.

Kraft is a major diversified food company that manufactures and distributes retail food products to global customers. One can think of Kraft as the conglomerate of the food industry. The stock has been an outperformer, returning 12% in 2011. It offers a yield of 3.38% with a payout ratio of 63%. Since April, Kraft has been trading in between a narrow range of $32 - $36. Analysts estimate 8% EPS growth for the next 5 years. Based on this estimate, Kraft has an O-Metrix score of 3.61. Its fair value range is $30 - $50.

Google is one of most innovative companies in the world. Established in 1998 by two doctoral students, the company became a global internet giant within a decade. J.P. Morgan increased its holdings by 70%, and owns 2.60 million shares.

While the company is highly profitable with a net margin of 27%, the stock was a disappointment in 2011 with a negative return. It was highly volatile, bouncing between $500 - $600 ranges several times in this year. Those smart enough to buy low at $500 and sell at $600 could have returned 40% in 2011. Analysts are pretty bullish on Google’s future, expecting an annualized EPS growth of 20%. Based on this estimate, Google has an O-Metrix score of 6.29. Its fair value range of $762 - $932 implies significant upside potential.

California-headquartered Occidental is one of the largest oil and gas explorers in the world. The company employs over eleven thousand employees with operations throughout the Americas and the Middle East. Following the trend in lower oil prices, Occidental also lost 10% in 2011.

It pays a decent dividend of 2% with a low payout ratio of 23%. Besides JP Morgan, Jim Cramer is also bullish on Occidental, suggesting that the stock is “on sale”. Based on 10% EPS growth estimate Occidental has an O-Metrix score of 5.57. Its fair value range is $116 - $161.

Big Sells

J.P. Morgan reduced its Exxon holdings by 16% in the last quarter, but still has 1.84% of portfolio invested in the company. Exxon, the largest company in the world according to the market cap, is trading with single digit trailing and forward P/E ratios. It has a solid balance sheet with no debt problems.

Its Price to Sales ratio of 0.75 is also well-below the market average. Nevertheless, with a market cap of $354 billion, Exxon does not seem to have much growth potential left. Based on 6% EPS growth estimate, Exxon has an O-Metrix score of 4.77. Its fair value range is $104 - $137.

PepsiCo is another company that was on the third quarter sell list. PepsiCo, the largest competitor of Coca-Cola (NYSE:KO), is a manufacturer and marketer of fast snacks and ready-to-drink beverages, worldwide. Founded in 1898, PepsiCo controls four major divisions, two of which primarily operate in the U.S. markets.

With a low Beta of 0.51 and high yield of 3.3%, PepsiCo looks like a good defensive play, but the stock disappointed its shareholders in 2011 with negative returns so far. Based on 7.4% EPS growth estimate, Pepsi has an O-Metrix score of 3.67. Its fair value range is $57 - $72. At a price of $62, I think Pepsi is fairly valued.

EOG Resources reported quite nice profits in the last quarter. EPS of $0.83 and revenue of $2.89 billion was well-above the consensus estimates. While J.P. Morgan slashed its holdings by 62% in the third quarter, Jim Cramer is bullish on EOG, stating that the company is “absurdly, insanely” cheap.

EOG is a major player in the Bakken and Eagle Ford Shales. The stock looks expensive compared to its peers. EOG has a trailing P/E ratio of 24 and forward P/E ratio of 20. However, based on a pretty bullish EPS growth estimate of 33%, EOG Resources has an O-Metrix score of 7.64. Its fair value range is $133 - $180. Barclays has an overweight rating with an upgraded target price of $125.

Source: 4 Big Buys, 3 Big Sells At J.P. Morgan