Even though the whole financial industry has been moving up, Deutsche Bank recently reduced its rating on JP Morgan (JPM) from buy to hold and cut the stock's price target from $43 to $40. Considering the stock is trading at $39.27 at the writing of this article, that does not leave much room for growth. The analysts' concerns stem from a number of factors. Is it possible EPS estimates may be too high for 2013? Deutsche Bank has a downward lean for next year and it is not the only one saying this. Morgan Stanley thinks the markets are too bullish on earnings for next year also. It believes that S&P 500 companies will earn $98.71 next year, about 17.5% below consensus. Regulatory matters are also in the mix to have a negative impact upon the bank.
Colin Lokey from Seeking Alpha wrote an article on JP Morgan. He summarizes what he believes Morgan Stanley assesses as the impact of LIBOR on JP Morgan's earnings next year. He writes:
"Morgan Stanley estimates JP Morgan's total litigation settlement expenses to be $975 million, which, if taken over two years, will have a negative 2% impact on the bank's 2013 earnings and a negative 1% impact on the bank's 2014 earnings. While this cost is by no means astronomical, it is nonetheless yet another drag on the bank's results."
Given the recent rise of almost 30% in value since its low in 2012, the risk/reward ratio of the stock (and possibly financial stocks in general) may not be that inviting at the moment.
The whole outlook on the financial markets and a lot of the influence upon JP Morgan may be from the earnings outlook moving on into 2013. In fact, fourth quarter earnings may be as much as 25% lower for some companies. In October the new Basel III requirements will take effect and we may see banks reducing their "shadow" real estate inventory again which could negatively affect home prices. I do not see another QE3 adding much in terms of consumer confidence and politicians are going to be consumed with fiscal cliff problems post election. Both Chinese and European data suggest a downturn in economies. Look for more volatility and nervous investors after a short term positive market reaction to a stimulus package. These things never play good on the financial markets and I do not believe it will fare well for JP Morgan individually.
Since early June, at its low of just under $30, JPM has steadily moved up. It has gained roughly 28% in value since that time. What makes it nice is that this growth has been consistently steady, not erratic huge climbs that may need to pull back. And all the indicators are supportive of this. The RSI has continually moved up with the stock in bullish territory. The MACD is also in bullish territory and has been there. So the stock is in a nice bullish channel and it is not showing signs of pulling back just yet. Trading presently at $39.38, it will not meet significant resistance until it moves another 10% just above the $42 marker.
The Options Play
- Buy a March 2013 put with a strike of '39' (priced at $3.40)
- Sell a March 2013 put with a strike of '38' (priced at $2.87)
- Net Debit to Start: $0.53
- Maximum Profit: $0.47
- Maximum Risk: net Debit
- Maximum length of Play: 7 months
Reasoning behind the Trade
- Poor earnings projections will not sit well with the financial markets.
- The possibility of housing prices stumbling with the coming of Basel III.
- Fiscal cliff worries will not bode well on markets post election
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.