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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

JP Morgan Chase

June 10th 2011 JP Morgan Chase
NYSE Symbol: JPM
Industry: Banking
Price as of 6/10: $41.05

The correction continues as the major averages have declined six straight weeks. Money continues to rotate into income ideas. High yield and sovereign debt closed end bond funds are acting great, some trading at new 52 week highs. Real Estate Investment Trusts are also performing well, but the rest of the market is struggling including the financials. Since January, the financials have performed awful; the single biggest frustrating sector in the market. A slowing economy, a weak housing market, and mounting regulations have investors shying away from the financials. The bank stocks continue to drift lower with many trading at book value or tangible book value, and some at two year lows like Bank of America. What a disappointment. This week we'll feature the blue chip bank amongst the dogs, JP Morgan Chase. The CEO of JP Morgan, Jamie Dimon made news last week at a conference saying their fundamentals are improving not that Wall Street is paying attention. This week, Mr. Dimon traveled to Atlanta to confront the Fed Chairman face to face about the mounting regulations.JP Morgan's stock is now trading for less than 10 times earnings and less than book value and now provides a 2.5% dividend yield and goes ex-dividend on July 1st. Other cheap financials include PNC Financial trading for 10 times earnings and providing a 2.3% yield. Wells Fargo another cheap bank trades at book value and yields 1.9%. Wells Fargo made news this week saying their stock is too cheap and they will use their remaining $200 million in allotment to buy back their stock. Morgan Stanley's dividend is less than 1%, but the stock trades 30% below its' book value. The financials could remain under pressure for a while longer, but eventually they will shine once again. Case in point, if JP Morgan traded for 11 times next year's earnings, the stock would be at $62 a share or 50% higher from current levels. Good value that should eventually reward shareholders.

Back in the middle of April, JPMorgan Chase reported earnings of $5.6 billion or $1.28 a share, 12 cents better than expectations. A chunk of the earnings or two billion in pretax profits came from reduced credit card loan loss reserves. Revenues fell 8.5% year over year to $25.79 billion. The company reaffirmed they would increase the quarterly common stock dividend to 25 cents from 5 cents a share. The company also reaffirmed it will authorize a new $15 billion multi-year common stock repurchase program, of which up to $8.0 billion will be repurchased this year.
Speaking on their conference call, CEO Jamie Dimon said the firm's results reflected a strong quarter across all divisions, in particular, investment banking. Fees rose 23% to $1.8 billion. That included record debt underwriting fees of $971 million, up 33% from the prior year, and a 41% increase in advisory fees to $429 million. More clients are paying their loans on time and less and less are behind by 30 days or more, but the housing mess is not going away. The slump in real estate continues to weigh heavily on JPMorgan's results. The bank increased its provision for mortgage-related losses by $1.1 billion. Its home equity loan portfolio had losses of $720 million and sub-prime mortgage losses were $186 million. Losses from "prime" mortgages, or loans made to borrowers with good credit, were $165 million.

So unfortunately, the housing related losses will continue for a while and investors will remain cautious about investing in the big banks, but they are attractive. As mentioned, JP Morgan Chase trades for 8.3 times earnings, 7.2 times next year's earnings, and less than 1 times book value of $43.36 a share. The company provides a one dollar dividend and goes ex-dividend on July 1st. Back in March the Fed lifted many of their restrictions on the financials allowing the well capitalized banks like JP Morgan to raise their dividend once again and also issue share buybacks. The dividend payouts should continue to grow in coming years as the fundamentals slowly improve. Inevitably, the financials will come back into favor, but it's been and may still be a frustrating wait.