Article by Investment U
J.P. Morgan Chase (NYSE: JPM) isn't going anywhere. Don't miss out on this rare value stock investing opportunity.
Unless you’ve been on a deserted island for the last two weeks and haven’t heard:
J.P. Morgan Chase (NYSE: JPM), our country’s biggest bank, admitted on May 10 to an unexpected trading loss in its chief investment office (CIO) unit.
And to make it more of a public relations nightmare, it’s a bad hedge on credit derivatives. At that time, the loss was reported at more than $2 billion. According to Morgan’s chief executive, Jamie Dimon, who called the actions “flawed” and “poorly reviewed,” it’s going to take some time before they know the total damage. Its shares have tumbled in response falling 2.9% to close at $32.51 on Monday of this week, bringing their monthly losses to 24%. So far this year, the shares have lost 2.2%.
This, my friends – believe it or not – is what’s called a buying opportunity.
The Star Pupil of the Bank
So how did this happen?
Up to this point, the chief investment office had been the star pupil of the bank. The unit was bringing in some big profits for J.P. Morgan even as other businesses at the bank, like home loans, began to hemorrhage. What no one addressed however, were the unit’s increasing risk. Or since they were making money – no one really cared.
As early as 2010, the senior banker who has taken the blame, Ina Drew, began to lose her grip on the bank’s chief investment office, according to current and former traders. She had guided the bank through some of the really tough times of the 2008 financial crisis, earning the trust of Dimon.
But after contracting Lyme disease that same year, she was frequently out of the office for a critical period, when her unit was taking riskier positions, and her absences allowed the inmates to run the asylum.
Dimon has described the trades as “sloppy” and “stupid,” and believe me he will not be embarrassed again.
Profiting Despite the Loss
J.P. Morgan Chase is the biggest U.S. bank by assets and it’s still expected to make a profit in the second quarter despite the losses in the CIO unit.
When everyday citizens start hearing about the loss of billions of dollars, we think the world is about to go bankrupt. But, in the world of government and high finance, the word billion isn’t that special. Remember, we have a deficit in the trillions.
So to J.P. Morgan, a $2-billion loss is not a huge amount. The loss represented about 0.5% of J.P. Morgan’s Cash and Cash Equivalents. Even with the loss, J.P. Morgan remains within the required Basel III Capital Requirement of 8% at 8.2% to be exact.
To relate it to the common man, you just lost your buy-in on poker night.
Media Versus Fundamentals
A $1-billion net trading loss during the second quarter would bring down earnings by around $0.17 per share. Analysts over the past week have already lowered their full-year estimate by $0.27. Even when you take all this into consideration, J.P. Morgan’s earnings are expected to go up to $4.71 per share this year from $4.48 last year. Early forecasts for next year call for earnings of $5.55 a share.
In March, I wrote an article about banks that passed the Fed’s stress tests and how they were then given permission to raise dividends. J.P. Morgan decided to increase its dividend to $0.30 a share and set in motion a $15-billion equity repurchase program.
Speaking at a financial-services conference organized by Deutsche Bank in New York, Dimon, stated that the bank will maintain its dividend.
“I’ve been asked a lot of questions about capital distribution,” Dimon said. “I made the mistake at the shareholder meeting, saying I hoped to continue dividends. No, we intend to maintain the dividend.”
He reiterated that the bank still has a “fortress balance sheet” that is “barely nicked by this thing.”
The repurchase program has been put on hold. Now there’s been dialogue out there that the repurchase program was suspended because of the loss. However, as the numbers show, that doesn’t wash. But here is what does:
- The bank decided to suspend share buybacks in order to meet global regulatory requirements on higher capital levels, and not because of the size of trading losses in the CIO. “We intend to restart it [share buyback program], but we’re not going to tell people when we do that,” he said.
- Jaret Seiberg, senior policy analyst at Guggenheim Securities LLC, said that J.P. Morgan’s decision to suspend share buybacks reduces the risk that regulators would force the bank to reduce or suspend its dividend.
- The move also improves the bank’s image in Washington, just as key financial regulations are being finalized. “By taking the initiative itself to suspend repurchases, J.P. Morgan appears to be acting like a responsible adult,” Seiberg wrote in a note. “That will buy it credibility in the coming weeks when Jamie Dimon appears on Capitol Hill.”
Still Rated a “Buy”
Over 20 analysts still rate the stock a “Buy,” according to FactSet Research Systems Inc. Of the 26 analysts whose price targets and recommendations are tracked by FactSet, 17 have price targets for J.P. Morgan stock of $50 or above.
For analysts who follow J.P. Morgan, here’s the million-dollar question: Will the bank’s strong financial position trump the “occupy Wall Street” momentum in the media? Is Wall Street running amuck again in those markets we don’t understand… or was this just a bad play that’s already been corrected?
Rather than indict the whole bank, I’ll place the blame over there in London on some over- zealous traders. In the end, I personally see all this as an opportunity to buy a stock that was headed for a good year before. Dimon pulled the curtain. Despite the negative publicity brought by this, J.P. Morgan has strong fundamentals that should balance weaknesses that occurred in one business unit.
Good Investing,
Jason Jenkins
P.S. J.P. Morgan Chase is not the only screaming buy at the moment. Each day, our Investment U Plus subscribers have access to top stock recommendations from our team of contrarian investing experts.
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Article by Investment U
