Buying Best-of-Breed Financial

Monday, December 14, 2009

Stock: JP Morgan Chase & Co. (JPM)

Fundamental Rationale:

JP Morgan Chase is a top-notch financial institution and the best-of-breed universal bank in America. The collapse of the investment banking arena has shifted major market shares in various banking services to the survivors and particularly JPM, Goldman Sachs and Morgan Stanley. JPM has already repaid the $25 billion TARP loan freeing it of intrusive government regulation. Its well-timed acquisitions of Bear Stearns and Washington Mutual at bargain prices with government guarantees should be accretive to earnings in the coming quarters. The Bear Stearns acquisition gives JPM leading market share in global prime brokerage and the Washington Mutual takeover expands JPM's presence is the Western United States. From a management persepctive, Jamie Dimon is exactly the man investors want in charge. As a straight-talking, traditional banker with nearly ten years of CEO experience heading major banking institutions, Dimon has kept the firm conservative and consistent while others chased profits and destroyed themselves.

JPM maintained profitability throughout 2008 recording only two negative quarters in earnings per share for a relatively mild 34 cents in losses in Q3 and Q4 2008. The company recorded $0.80 per share for Q309 and analysts expect EPS of $0.77 per share for Q409. The stock currently trades at 18 times 2009 earnings. With a continuation of these more normalized Q3 and Q4 earnings into 2009 and a modest 10% EPS growth rate (below 9-year average rate) JPM trades at 12 times forward earnings. JPM can easily trade for 15 times earnings given historical averages, and this is likely a modest multiple given its increasing market share and solid reputation going forward. At 15 times forward earnings, JPM would trade at $51.50, a 23% rise over today's closing price.

Technical Rationale:

Shares of JPM have found solid buying interest at the $40.50 level five times now creating a significant support level. Today's surge higher shows strength as other financials were treading water and Citigroup saw selling after announcing its TARP repayment plans. This divergence made me notice today. JPM has trended lower at a steady, controlled pace since it made its highs for the year in the middle of October. I bought an initial position today against the $40.50 support level and will look for a high volume move through the descending trendline this week. A confirmed break will indicate that the two-month trend has changed. JPM will then have the possibility of restarting its major uptrend and achieving my fundamental targets.

I am cautious of the trade being so easy with support holding this nicely. I would not be surprised to see a breakdown through $40.50 and technicians jumping in calling it a head-and-shoulders reversal pattern. Given the underlying fundamentals I find a significant downturn in shares unlikely and I would look for compelling entries should this happen.

This is not a recommendation of a buy or sell transaction. The stock may or may not be entered by TWS Investments. This website is not intended as an advisory service.


Macroanalyst said...

Hey, I have JPM too. Let's hope you are right :)

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