J.P. Morgan Chase and Co. (JPM) manages ~ $200 bn in equity assets primarily through its asset management subsidiary JP Morgan Asset Management. It caters to high net-worth individuals, corporations, pension and profit sharing plans, charitable organizations and institutions.
Investment Strategy: J.P. Morgan Asset Management offers various strategies, including active extension, behavioral, core, enhanced, growth, long/short, quantitative and value. Investments are carried out through U.S., international and global portfolios. Emphasis is placed on identifying and monitoring key valuation and risk metrics. For the domestic investments, the J.P. Morgan Asset Management primarily employs fundamental research to identify favorable investments. A three-step process is applied, combining research, valuation and stock selection. J.P. Morgan purchases companies that are undervalued and considers selling them when they appear to be overvalued. In addition to valuation, it looks for a catalyst that could prompt a rise in a stock's price, a high potential reward compared with potential risk, or temporary mispricings due to market overreactions.
The following are some of the top buys of JP Morgan from the last quarter, according to its latest 13F filing.
Sirus XM Radio Inc. (SIRI): JP Morgan bought 9,745,006 shares of Sirus XM last quarter. It now holds 38,729,089 shares of the company. Sirius XM Radio Inc. provides satellite radio services in the United States and Canada. The company broadcasts approximately 135 channels, including music, sports, entertainment, comedy, talk, news, traffic, and weather channels on subscription fee basis through two satellite radio systems.
Sirius offers a differentiated consumer value proposition based on a broad and unique content line-up, seamless integration into the car and ease of use, and ubiquitous network coverage. I believe this will drive continued growth. Sirius' business model is characterized by low capital intensity, high operating leverage and incremental margins, pricing power, and lack of substitute products. All these factors make its business attractive.
The company has not seen any increase in churn rates despite of its recent price hike. This pricing power is definitely going to be an important driver of SIRI's valuation going forward. According to U.S SAAR numbers, auto sale for February has exceeded the expectations. This is also positive news as majority of its subscriber base is derived from auto sales. In addition there is a lot to watch in 2012 and beyond, with further contribution from used cars, roll out of Sirius 2.0 and the launch of internet based on-demand services.
Bank of America Corp. (BAC): JP Morgan bought 43,920,416 shares of Bank of America last quarter. It now holds 267,345,208 shares of the company. Bank of America is trading at over a 40% discount to its tangible book value, making it an attractive buy candidate. Over the past few months, BofA has executed several asset sales that are consistent with management's efforts to strengthen the balance sheet and improve the company's overall capital position. The company reported improvement in its regulatory capital ratios in the most recent earning release and management increased its guidance related to Basel III targets.
In quantitative terms, BofA saw $75 billion reduction in risk-weighted assets (RWA) in 4Q'11, leading to a $171 billion reduction for full-year 2011. Management increased its target Tier 1 common ratio to 7.25- 7.5% by year-end 2012 as pro forma RWA is expected to be $50 billion lower and capital deductions have been significantly reduced. These ratios are still lower than its peers but the trend seems to be headed in the right direction and it is likely that the company will be able to hit Basel required levels. The company is still trading at a significant discount to its peers and as the broader macro situation in Europe continues to improve, I see a good likelihood of the stock continuing its upward journey.
Cisco System, Inc. (CSCO): JP Morgan bought 18,836,224 shares of Cisco last quarter. It now holds 89,060,587 shares of the company. Cisco Systems designs, manufactures, and sells Internet protocol-based networking and other products related to the communications and information technology industry worldwide and provides services associated with these products and their use. Cisco's products are installed at large enterprises, public institutions, telecommunications companies, commercial businesses and personal residences.
Cisco recently posted impressive Q2 2012 results as revenues grew by 10.8% y-y against guidance of 8% and EPS of $0.47, versus consensus estimates of $0.43, driven by growth in routing and switching revenues. Cisco's routing revenues grew by 8.2%, clearly outperforming its competitor Juniper (JNPR). Its switch business also showed a turnaround with 8% y-y growth from declines in the recent quarters.
Looking forward, trends in the routing business seem positive as Cisco is gaining market share, while Juniper is struggling with its product timing. Cisco's switches business is also expected to continue doing well with product refreshes in the Catalyst and Nexus lines. Margins are also expected to improve due to pricing power from product refreshes. Overall, I believe Cisco is well positioned for steady 6%-8% growth. With improving margins, product refreshes and a strong execution capability, there is good upside potential for the stock price in the near term.
Dell Inc. (DELL): JP Morgan bought 6,462,112 shares of Dell last quarter. It now holds 13,697,117 shares of the company. Dell Inc. is one of the world`s largest manufacturers of computers, with worldwide PC market share of ~13% and FY11 revenue of $61 billion. The company offers a full range of IT products and services including desktops, notebooks, PDAs, servers, storage systems, printers, and other peripherals, which it primarily sells to customers using a direct model. The company also provides services and resells third-party peripherals and software.
Recently, Dell reported a mixed January quarter. However, its guidance for 7% declines in the April quarterly revenues was disappointing, causing the stock to give away some of its YTD gains. I believe investors should utilize this opportunity to go long on the stock. Dell is still in the initial stages of transformation and such speed bumps are likely. However I am still bullish about the medium- to long-term prospects of the company.
Smarter business practices helped Dell improve its gross margins profile in 2011. Going forward, it is expected to continue as component pricing trends improve along with a shift in the revenue mix towards non-PC and value add solutions. With its enterprise storage better integrated, Dell could be a serious competitor in storage space, which offers long-term growth. Dell also announced the creation of a new software group, which I believe is another step towards transforming the company to more of a solution provider. Dell, with its strong balance sheet and cash flow generation could make strategic acquisitions and repurchase shares. All these factors indicate a strong medium-term outlook with accelerating revenue growth.
Microsoft Corp. (MSFT): JP Morgan bought 7,059,442 shares of Microsoft last quarter. It now holds 114,962,454 shares of the company. I am not too positive on Microsoft's prospects. Although Microsoft's stock has seen a decent run up after a long time in anticipation of Windows 8 launch, I am not too positive on its prospects. Microsoft is going to launch Windows 8 OS this year, which can be used with tablets. As tablets continue to take market share from tradition PCs and Laptops, it was important for Microsoft to have an OS which works for tablets as well. However, Microsoft has entered this space very late and I believe this delay will prevent Microsoft from gaining a leadership position in the tablet space, which will have adverse consequence. It might end up being a 3rd player just like what happened in the mobile space. Apple's (APPL) iOS and Google's (GOOG) Android are the main platforms in the smartphone space and they will likely be tough competition for Microsoft in the tablet space as well. After the recent run up it appears like the market is anticipating a blockbuster launch of Windows 8, which I see unlikely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.