JPMorgan Is The Best Financial Long-Term

Includes: BAC, C, JPM, PNC, USB, WFC
by: Insider Monkey

Bank of America (NYSE:BAC) became a deep value stock with the recent declines. Even Warren Buffett took a stake in the company. Its earnings are expected to grow at 7.8% per year during the next five years, assuming these growth projections are acccurate. It may even be the case that BAC won’t be here in 5 years. It suffered net loss of $9.13 billion in the second quarter of 2011, equal to $0.90 per share, which was largely due to a $13.2 billion loss recorded in mortgage banking from the June 29 settlement.

Despite that, BofA was still quite popular among hedge funds. John Paulson, Bill Miller and David Tepper all had over $100 million invested in Bank of America stocks at the end of the second quarter. We are going to take a closer look at Bank of America and its comparable companies in the financial industry, including Citigroup,(NYSE:C) Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM), PNC Financial (NYSE:PNC) and US Bancorp (NYSE:USB) to determine which stocks promise higher returns for investors.

The company reported revenues of $28.7 billion for the third quarter of 2011. Third-quarter net income was $0.56 per share. Third-quarter results included $4.5 billion (pretax) in positive fair value adjustments on structured liabilities, a pretax gain of $3.6 billion from the sale of shares of China Construction Bank (NASDAQ:CCB), $1.7 billion pretax gain in trading Debit Valuation Adjustments (NYSE:DVA), and a pretax loss of $2.2 billion related to private equity and strategic investments, excluding CCB. BofA is expected to lose $0.06 in 2011 and earn $1.01 in 2012. The stock recently traded at $6.46.


BofA’s earnings are expected to grow at 7.8% over the next five years. This implies that its P/E ratio using its 2014 earnings is around 5.50. Citi is expected to grow at 9.12%, and its P/E ratio in 2014 is 5.72. Wells Fargo is expected to grow by 10.11% over the next 5 years, and its P/E ratio using its 2014 earnings is around 7.27. JPMorgan’s expected growth rate is 6.75%, and its corresponding P/E ratio is 5.94. PNC’s earnings growth is expected to be 5.29%, and its P/E ratio in 2014 is 7.87. US Bancorp is expected to grow by nearly 8.46%, and its P/E ratio using its 2014 earnings is 8.27. The P/E ratios of these financial stocks are quite low compared to the industry average P/E of 14.38. During the recent market turmoil, most financial stocks did not perform well and suffered huge losses. They are currently traded below their intrinsic value. Among the stocks in the group, BofA looks undervalued, as it has the lowest expected P/E ratio in 2014. Citi and JPMorgan’s P/E ratios are also quite low, despite the fact they are perceived to be less risky alternatives to BAC.


Volatility is generally used as a measure of risk. BofA’s beta is 2.76, Citi’s beta is 2.89, Wells Fargo’s beta is 1.78, JPMorgan’s beta is 1.06, PNC’s beta is 1.45, and US Bancorp’s beta is 1.22. BofA’s beta is pretty high compared to other stocks in the group, indicating that the stock is riskier. Citi’s is even a bit riskier than BofA. JPMorgan has the lowest beta in this group.

Hedge Fund Ownership

Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on average. Citi was the most popular stock among hedge funds at the end of second quarter. It was held by 90 hedge funds (nearly 30% of the funds tracked by Insider Monkey). JPMorgan was the second most popular stock. 85 hedge funds were bullish on it. Bank of America was also held by 77 hedge fund managers. Wells Fargo was the fourth most popular stock; 61 hedge funds were bullish about WFC. John Paulson is bullish about Citi, Wells Fargo, JPMorgan and BofA. PNC and USB were held by 39 and 28 hedge funds, respectively.

Insider Purchases

Stocks purchased by insiders tend to outperform the market on the average. JPMorgan was purchased by most insiders. Six insiders bought the stock over the past six months. WFC and PNC were both purchased by two insiders. BofA and USB were purchased by one insider during the same period. Citi does not have insider purchases over the past six months.

Overall, our analysis points out that Bank of America, Citi and JPMorgan are undervalued compared to the other stocks in the group. BAC and C are, however, riskier than their comparables. Strong hedge fund interest for these three stocks also indicates some form of perceived value. JPMorgan is also very popular among insiders, while BofA was only purchased by one insider, and Citi does not have insider purchases. We think JPMorgan is the best choice among this group.

Disclosure: I am long C.