Could you imagine losing $2-$5 billion in a matter of two weeks? A couple weeks ago, I am sure none of us could. Unfortunately for JPMorgan (JPM), that is exactly what happened. However, I am not going to focus on the negativity that companies can get hit by when these types of situations arise. To me, the bigger question is if JPMorgan is now attractively priced or not.
Before the news broke, the stock had been flirting with new 52-week highs in the mid to upper $40s per share. Since then, the stock has seen a quick decline and is trading in the lower $30s, losing over a quarter of its value. So where does the stock stand now?
The stock's price to earnings ratio is at 7.50. The company is well below the industry ratio of 14.6 and less than half the S&P 500 at 18.7. With the price drop in JPMorgan's stock, the dividend yield becomes more attractive at 3.5% annually, or $1.20. The stock does have a high beta of 1.57, making it more volatile than the market. However, this is not uncommon amongst other bank stocks. Some of the competitors looking to capitalize on JPMorgan's missteps are Bank of America (BAC), Wells Faro (WFC), and Citigroup (C).
Previously, I have recommended Bank of America as a buy opportunity. The stock has seen its share of ups and downs since then. While the stock did rise over the last few months, the most recent earnings report has brought the stock back down. While I know the stock is highly volatile and has a bad image compared to some of the other big banks, I think the current price is a good entry point for investors looking to hold this stock for a few years. The stock is trading at a deep discount with a price to book value of only 0.35. The company is currently trying to put some of that imagery, and debt, behind it. Bank of America has begun reaching out to customers who might be eligible for forgiveness of a portion of the borrowers' principal mortgage balance. This was part of a recent settlement amongst five major banks, 49 state attorneys general and the federal government.
As one of the country's largest banks, Wells Fargo has been a favorite amongst investors. One investor of note is Warren Buffett of Berkshire Hathaway (BRK.A). The stock has performed better than other big banks with an increase of a little over 10% over the last 12 months. With the company originating one in four U.S. mortgages and servicing one in six, it is easy to see why the bank is an attractive buy. To further a bullish position on Wells Fargo, the company was also the top SBA lender in Colorado for the first half of the 2012 federal fiscal year, ending March 31st.
Of the banks discussed, Citigroup has had one of the hardest times. Over the last 12 months, the stock has lost over 30% of its value. One reason for the stock's underperformance is due to a warning that the company may not increase dividends for the remainder of the year. Part of the reason is due to the company failing the most recent Federal Reserve's stress test. Of the 19 banks tested, only four failed; including Citi. To further the company's bad fortune, Citi was recently sued by Woori Bank. The suit is to recover losses from the lender's $95 million investment in collateralized debt obligations that are claimed to have been sold fraudulently. While this type of news can certainly bring a stock down to a price worth buying, litigation can drag out. If Citi is required to pay back the losses, it could be detrimental to the company's bottom line. I would avoid the stock at the moment and watch to see which way the price goes.
With foreclosures hitting a record low, this is only going to be a good thing for all of the banks mentioned. However, in the case of JPMorgan, they have things to worry about other than defaulted mortgages at the moment. The loss caused by JPMorgan has rekindled talks of strengthening banking regulations. President Obama has indicated that he backs tougher bank regulations. Some executives, including JPMorgan's Jamie Dimon, have expressed that there is fear the company's loss would be used to strengthen regulation on the industry. While some research companies in the industry have downgraded their expectations of JPMorgan, Standpoint Research has upgraded them from Hold to Buy. In addition, analysts have a mean target price for the stock at $50.52. If the stock is able to reach this goal from its current price, it would be an increase of roughly 50%. While I do believe this is attainable by the company, it will most likely take longer now that the price has dropped.
However, because of the drop, I do believe that JPMorgan is at a good price for entry as the stock is currently trading less than its book value with a ratio of 0.7. While the loss is bad, some fear that the losses are even more than what have been reported. That being the case, the stock's price will continue to decline. Ultimately, I see the price of the stock improving in the long run, making the stock currently a buy. If the price ends up going down further, I would buy more.