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Time to Bail Out of JPMorgan Chase
06/07/2011 5:04 pm EST
Bank stocks look cheap on a historical basis. Unless, of course, revenue and earnings growth have ground to a halt in the sector.
That, unfortunately, is exactly what happened last quarter, as loan demand grew not at all at most banks, and earnings improvements came pretty much solely from the reduction of reserves against bad loans. And that’s an increasingly consensus view of what banks will report for the second quarter as well.
I think we’re seeing a shift in investor attitudes—from optimism about improving earnings, based on the bank reserves, to dismay at a lack of revenue and earnings growth from traditional bank businesses.
Partly that’s the result of reports that show a slowing in the US economy—bank revenues would be hit by any slowing in economic activity. And partly it’s a worry about changes to US and international banking regulations, which:
- Promise to cut the revenue that banks can make from things like debit-card transactions (this could go into effect as early as July 21, or suffer a six-month delay, according to proposed Senate legislation);
- Threaten to raise capital requirements, so that the biggest banks have to keep more cash on hand (The Fed is arguing for a 3-percentage-point extra reserve requirement for the biggest banks).
Take a look at JPMorgan Chase (JPM). In the long-term, I think this is one of the best growth stories among the big US banks. The bank took relatively little damage from the global financial crisis, and that has given it the ability to expand into new markets—Asia for example—while competitors are still struggling to clean up their balance sheets.
From that long-term perspective, the bank’s current price-to-earnings ratio of just 8.8 on trailing 12-month earnings looks very cheap.
However, from a near-term perspective—say, 2011 and early 2012—the P/E ratio may be about right.
For example, Standard & Poor’s is a fan of the stock, giving it a four-star (out of five) “buy” rating as of June 3. But even this fan of the stock sees core revenue flat in 2011, and up just 2.3% in 2012.
If you’re a committed value investor, you may decide to hold onto these shares for the long-term recovery in the share price. At ten times projected 2012 earnings of $5.29, this $40 stock would trade at $53 a share.
But consider the way that sentiment has turned against the sector, the US economic slowdown, and the likely stream of bad news (or at least uncertainty) from now until November, related to how much extra capital a bank as big as JPM will have to hold. I think there’s a good chance that you’ll be able to get the shares at today’s price—or lower—in the fall.
So, as of today, June 7, I’m selling these shares out of my Jubak’s Picks portfolio with a 0.71% gain since I added the shares on September 16, 2010. (The shares will pay a 25-cent-per-share dividend to holders on the record date of July 6.)
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did not own shares of JPMorgan Chase as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
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