JPMorgan Chase & Co. (NYSE: JPM) bills itself as one of the oldest money management firms in the U.S., dating back more than 200 years. Today, the financial behemoth boasts total assets of $2.6 trillion…
JPMorgan Chase & Co. (NYSE: JPM) bills itself as one of the oldest money management firms in the U.S., dating back more than 200 years.
Today, the financial behemoth boasts total assets of $2.6 trillion — that’s almost equivalent to the total gross domestic product of India in 2017, the sixth-largest economy in the world.
With 250,000 employees and offices in more than 100 global markets, JPMorgan certainly fits the bill as a global investment banking powerhouse. But is it a portfolio powerhouse for investors looking to make an asset killing of their own in the banking sector?
Certainly, the pedigree is there for JPMorgan Chase, but investors want to see some profit potential for JPM stock, too. As 2018 draws to a close, the outlook on that front seems to be a positive one, but not without risks.
JPMorgan Stock at a Glance
JPMorgan Chase stock is trading near $110, with a one-year consensus target rate of $122 per share. JPM’s market cap is $366 billion and the stock’s dividend payout is a fairly ample 2.9 percent.
Investment experts say that the banking and finance sector is in something of a sweet spot, as economic trends are shifting in the right direction for banking and finance stocks.
“I like the financial sector at this moment,” says Glen D. Smith, managing partner for Glen D. Smith & Associates in Flower Mound, Texas. “We expect rates to continue to climb. And as rates go up, financials should profit more as the spread between what the banks generate on short-term notes and what they pay out to the customer continues to widen.”
Smith says JPMorgan is a best-of-breed bank stock, as the U.S. economy and consumer sentiment continue to trend upward.
“(JP Morgan CEO) Jamie Dimon recently said on a public conference call that wages are going up, participation is going up, the credit that has been written is pristine and housing is in short supply,” he says. “The confidence of both small businesses and consumers is extraordinarily high, which could drive a lot of growth for a while in spite of the headwinds out there.”
Pros to Buying JPM Stock
A series of rate hikes by the Federal Reserve has bank stock investors seeing green when it comes to companies like JPMorgan.
“In my opinion, JPM is the best-run bank in the mix,” says Chris Tuck, a wealth advisor for SJK Wealth Management in Doylestown, Pennsylvania. “The CEO, Jamie Dimon, is second to none.”
Banks are dependent on higher interest rates, which should be a key benchmark for banking investors. “This gives financial institutions the ability to charge more on loans while keeping savings rates lower,” Tuck says. “For example, banks will give you 2 percent on a certificate of deposit but charge 5 percent for a mortgage.”
But because of government regulations from the 2008 financial crisis, U.S. banks have very conservative balance sheets.That actually works in JPMorgan’s favor. “As interest goes up, the return on bank balance sheets improves,” Tuck says. “Deregulation could also be another catalyst if they are able to take more risks with their balance sheet.”
Other investment experts say that bank stocks are at an interesting juncture, and that investors would be wise to take note as opportunity knocks.
“Margins and earnings are rising, benefiting from rising loan rates that exceed deposit costs while enjoying low loan losses in a strong domestic economy,” says Andrew Aran, a partner at New York-based Regency Wealth Management. “Investors are cautious as many see future earnings growth as likely to decelerate as higher interest rates eventually decrease economic growth. Consequently, a number of bank stocks remain, in our opinion, attractively priced.”
Aran notes that JPM stock trades at a favorable price-earnings ratio of less than 14.
“We anticipate a double-digit return on JPM over the next 12 months reflecting continued economic expansion, stable to improving margins and stable asset quality,” he says. “Headwinds include increasing non-bank lending competition, mixed international growth and the possibility of higher inflation that could escalate interest rates beyond consensus expectations.”
Another reason to get in on JPM stock is its healthy dividend.
“A big factor that I find appealing is that JPM is continuing to raise its dividend, by recently going up to 42 percent to 80 cents per quarter,” Smith says. “Dividends, over time, can add a lot of value for investors.”
Cons to Buying JPM Stock
At face value, JPM looks like an inexpensive stock. But Holmes Osborne, a money manager at Osborne Global Investors Inc. in Odessa, Missouri, says investors should be more skeptical when considering a bank stock’s P/E ratio and dividend yield.
“Unfortunately, these metrics don’t work so well for bank stocks,” Osborne says. “Bank stocks are difficult to understand because you have to know what their assets are — mainly loans.”
JPMorgan has approximately $395 billion in short-term investments, $207 billion in current assets, $231 billion in long-term assets and more than $1 trillion in other assets, Osborne notes. “That’s a lot to keep track of,” he says. “In most instances, it’s almost impossible for the outsider to know much about the loans the bank has made. As a matter of fact, it’s confidential in many cases.”
That said, Osborne isn’t saying that JPMorgan is a bad stock. “I’m just saying it’s difficult to evaluate,” he says.
The Bottom Line on JPM Stock
Bank stocks aren’t exactly in vogue these days, but that’s OK, Smith says.
“Being a value investor, I find comfort with the current valuations of many banks,” he says. “Compared to many of the momentum stocks, (financials) seem more reasonably priced. As Mark Twain once said: ‘History doesn’t repeat itself, but it often rhymes.'”
“I believe as rates continue to climb, banks will have its moment to shine once again,” Smith says.