7 Low PE Stocks JP Morgan Is Buying

by: The Analyst Hub

JP 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: JP 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 JP Morgan Asset Management primarily employs fundamental research to identify favorable investments. A three-step process is applied, combining research, valuation and stock selection. JP 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 is a list of top low PE stocks, which JP Morgan bought in the last quarter according to its latest 13F filing with SEC.



Shares Held - 06/30/2011

Shares Held - 09/30/2011

Change in shares

Forward PE

Google Inc.






Microsoft Corporation






Occidental Petroleum Corporation






Emerson Electric Co.












Comcast Corporation






Capital One Financial Corp.






Capital One Financial has the least PE among above stocks and I like it the most as a prospective long candidate. Capital One's share price has declined along with the broader stock market. However, if we keep macro picture aside, fundamentals have actually improved for the company in the past couple of months. The company has announced two opportunistic acquisitions of ING Direct and US card business of HSBC (HBC) on very attractive and EPS accretive terms. Several sell-side analysts have raised their estimates and upgraded the stock in the last couple of months. Trading at 6.85x forward consensus earnings, I believe the stock provides a very good buying opportunity compared with other large financial institutions, given its transparent business model, which should appeal to investors in this volatile market.

I also like Google Inc. Google is the world's #1 search engine and online advertising company. Google is a defensive stock with high growth rate. The company's leadership position in its core search business is what makes it a defensive stock. Its main competitors, Bing and Yahoo (YHOO) Search, have been unable to pose any meaningful threat to Google -- despite burning a good amount of cash. From a growth perspective, Google is likely to post a double digit growth rate for the next several years as a secular shift of advertisers from traditional media to online media continues. Its mobile business is likely to be another major growth driver.

Many of Google's web properties are undermonetized. For example, only 3% of YouTube videos are monetized through video advertising. This can increase significantly going forward. I see big potential from the recent announcement by Google that it will be launching 100 online video channels on YouTube that feature new original programming from celebrities such as Jay-Z, Madonna, Shaquille O'Neal and Tony Hawk.

This venture will generate ~25 hours of new, on-demand, original content per channel per day, and Google is reportedly paying up more than $100 million in advance to its content partners. I believe this and similar partnerships can potentially have a very big impact in the long run, as more and more original content comes online through these partnerships. Quality content is likely to bring in more advertisers, and thus help in further monetization of Google's properties.

Google is trading at a forward PE of just 14x, despite the expected 20% top and bottomline growth next year. Although some investors are worried about increasing dominance of Facebook, I think it's too premature to say that Facebook can adversely affect Google's core search and advertising business. I find the risk-reward profile of Google very attractive at these levels.

One stock in the above list that I would like to avoid is Microsoft. I have been a Microsoft bull till the recent past despite its poor stock performance. My main bullish argument was its low valuations. However, I would like to change my recommendation now due to increasingly apparent industry trends, which will prove damaging to Microsoft's leadership position in PC software industry. PC software space has been traditionally dominated by Windows, providing a good defensive business for Microsoft. Growing computer literacy and internet adoption have driven Microsoft's business for past two decades. However, going forward, increasing tablet adoption is going to change the complete industry dynamics.

As tablets continue to take market share from tradition PCs and Laptops, Microsoft is bound to suffer. Microsoft doesn't have any presence in the tablet space as of now. It is going to launch Windows 8 OS next year, which can be used with tablets. However, I believe this late entry 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 iOS and Google's Android are the main platforms in the smartphone space and they will likely be tough competition for Microsoft in the tablet space as well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.