John Buckingham is a leading value investor and money manager; in his newsletter, The Prudent Specul...
JPMorgan: The Blue Chip of Banking
05/12/2020 5:00 am EST
With an unfavorable interest rate environment and expected weak demand for credit, banking stocks don't have many friends right now, asserts Chuck Carlson, editor of DRIP Investor.
However, it is never a bad idea to pick through beaten-up industries for those stocks that should be leaders once the group rebounds. And JPMorgan Chase (JPM) is one of those companies.
The firm is the blue chip in the banking sector; and while the shares have been hit hard, I feel confident that the stock will come back strongly as industry pressures subside and investors move back into the group.
Admittedly, that is not likely to occur immediately, but I think JPMorgan Chase stock will be trading significantly higher 18 months out, which makes it a stock worth considering at today’s depressed prices.
Morgan CEO Jamie Dimon is keenly aware of the economic damage and is preparing for the likelihood of what he characterizes a “fairly severe recession.”
The firm built credit reserves in the March quarter and will likely continue do so over at least the next couple of quarters. The good news is that JPMorgan entered this crisis in a position of strength, with total liquidity resources of over $1 trillion.
The question shouldn’t be whether the future, at least in the short term, will be a tough one for JPMorgan — it will be, no question.
The question that investors should be trying to answer is whether the stock’s already massive decline is discounting future problems. And while I can’t say for sure that the stock has bottomed, I do know these shares are trading at fairly cheap levels for long-term investors.
The dividend yield of 4% is three times the yield on a 30-year Treasury bond. To be sure, I suppose there is a risk that regulators will force the company to cut its dividend, but I give that event a very small probability of occurring.
Bottom line is that I can buy perhaps the best-in-class money-center bank . . . at a massive discount to where it was trading just two months ago . . . at a dividend yield that pays me nicely while waiting for the stock to rebound. That is a story that is tough to pass up.
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