Big bank stocks haven’t been particularly well-loved as of late, as evidenced by their lower price to earnings ratios. JP Morgan Chase is at least the most loved of the bunch.
A company like a JP Morgan Chase isn’t going to excite a lot of investors with its growth potential, and bank stocks themselves are generally viewed as rather unexciting generally by the investing public. They are often seen as more suited to older investors who are attracted by their healthy dividends, although they aren’t generally stable as utility stocks, which also pay very good dividends generally and don’t suffer from the same swings in business.
JP Morgan Chase’s business has been very stable and solid over the past few years though, in a low interest setting that is supposed to be not so good for banks. We get happy generally about our stocks when interest rates are low, because the debt of our companies becomes priced more cheaply, but banks are on the other side of this ledger and their income gets discounted from this.
This is not as big of a deal as a lot of people think though, and the success of JP Morgan Chase through the very low interest rates that we’ve seen over the last decade is testimony to this. Banks did of course take a big hit during the financial crisis, and JP Morgan Chase did see their shares drop by 70% during that time, falling below $16 a share at one point, but their business remained profitable throughout all this.
Sure, their earnings per share did drop from $4.33 per share in 2007 to $1.35 in 2018, and investors don’t really like drops in earnings like this, but this in itself should not have a stock dropping 70% of its value. With a bank as big as this, that’s a lot of money being taken off the table with a stock whose earnings did take a hit but showed us nothing that should have had us concerned about its long-term prospects.
Sure enough, things did pick up, and with the sole exception of 2013 where their earnings dropped from $5.20 to $4.34, JP Morgan’s earnings have risen every other year. 2018 saw a big push forward, where the bank booked in $9 per share, up from 2017’s $6.31.
This Bank Just Makes More and More Money
2018 saw the bank achieve the second highest net income of any U.S. company with the $32.5 billion they made, which was second only to Apple. We know now big Apple’s market cap is, but Apple is a much more exciting stock, or at least as seen to be.
Apple’s price-to-earnings ratio is now down around 16 right now, which is about average. JP Morgan Chase is a respectable 11.6 right now, but in spite of that, the stock has mostly moved ahead over the past 7 years, and have been rewarded with their stock price doubling over this time.
This ratio can tell us some useful things about a stock, and we certainly don’t want this getting too out of line such that it would scare investors away, even though this has nothing to do with a stock’s price essentially and it doesn’t make sense to trade on this number when it gets too high unless you are concerned with others doing so.
All this really tells us is how much love a stock is getting, how much people like the stock in other words, and liking stocks is what puts up stock prices. Earnings, whether last year or projections for the coming year, only tell part of the story and the real story is simply the mood of the market which drives everything.
JP Morgan Chase’s stock simply is not as loved as Apple’s stock is, but this does not mean that we can just say that the bank therefore deserves to be loved and we should bet on that happening. This is value investors think though, and while some of their picks do work out pretty well, it has nothing to do with this formula, which when low is actually bearish not bullish, and vice versa.
We shouldn’t even be looking at this when it comes to deciding whether to bet on JP Morgan Chase stock, or to keep our bets on the table. The stock itself will tell the story here, the actual valuations of their stock by the market and the direction that this is heading in.
JP Morgan Chase Looks Like Money in the Bank Long-Term
When investing for the long term, it certainly can be helpful to look at a company’s fundamentals, not to look to flesh out low earnings multiples but to look at a company’s overall health and future. They don’t come much better than JP Morgan Chase, which has performed very solidly for quite a while and is actually accelerating its growth now.
When you add in the dividends that this stock pays, and the way that its stock has performed price wise, together with their being the leader in banking in the United States and ahead of the curve generally, JP Morgan presents a tempting long-term investment indeed.
CEO Jamie Dimon, considered one of the real rock stars of corporate America these days, tells us that he is not afraid of a recession and his bank is prepared to deal with any contingencies. The bank has really prospered under his leadership, and although he’s now 63 and nearing retirement age, he has agreed to stay on for another 4 years.
4 years is nowhere near as long as the time horizon of a longer-term investor, but this bank is more than just Dimon’s talents, and there’s no real reason to think that JP Morgan Chase will not continue to prosper under future leadership.
Should the economy take enough of a downward turn to drive interest rates down, this brings up stock markets generally, and bank stocks as well get caught up in this, even though we might think that this isn’t good for them. This happens in the other direction as well, when rates rise, and while we may see this as good for banks, their stocks also tend to get sold along with the rest of the bunch out of concerns of this.
The fact that the bank will be fine if we do get a little recession in the next two or three years shouldn’t really be even questioned, even though traders will no doubt punish their stock if this happens, as they will with stocks generally if this happens. However, It’s not likely that it will get hit anywhere near as hard as it did in 2008, and that was an extreme event actually, far beyond what anyone is predicting now.
Massive credit defaults hit banks directly, as they are the ones that bear the losses here, and while such a thing can cause markets and the economy as a whole to tumble, as this one did. The fact that JP Morgan held it together so well during these trying times speaks loudly to its long-term stability.
That’s the real reason why we should strongly consider JP Morgan Chase as a long-term stock play, which is just how solid a financial institution this is. We’re past huge financial institutions putting their lives on the line like they did with the swaps back then, but if your bank not only survived all that but actually made money every year during those times, this is a bank that does know how to manage risk properly, and therefore our risk as well.