Stock of the Week
JP Morgan Chase
JP Morgan Chase
NYSE Symbol: JPM
Price as of 7/22: $98.69
The major averages continue to perform well during this pandemic. The Nasdaq and tech shares have been the stand out surging to new all-time highs. The S&P 500 moved into positive territory for the year this week. The Dow Jones remains down 6% for the year while the mid-cap Russell 2000 is still down double digits. Even as the averages perform well, most sectors and stocks are being left behind leaving plenty of opportunities for investors that have missed out on the rebound. This week we will highlight the financial sector which reported earnings last week. This week we will highlight the largest US bank, JP Morgan Chase. Thanks to what they call a, "fortress balance sheet" JP Morgan Chase continues to make money in these troubled times allowing the bank to maintain their dividend with an attractive yield of 3.5%.
Last week, JP Morgan Chase easily beat reduced earnings estimates thanks to their trading division as sale rose 17% year over year to $33.82 billion. The quarter was not without its problems. Provision for credit losses continue to grow rising to $10.5 billion, up from a record $9.3 billion in the first quarter. JP Morgan is building its reserves to reflect further weakness in the economy particularly in their consumer division which includes credit cards. Following earnings CEO, Jamie Dimon stated the world is in "unprecedented" times and no one knows what's coming next. But luckily for investors, JP Morgan Chase can weather this pandemic better than most if not all other banks as Jamie Dimon went on to say his bank is a, "port in a storm."
Even though JP Morgan is building massive reserves, the bank can still absorb further losses with a capacity at over $34 billion in credit reserves with total liquidity resources of $1.5 trillion. In the second quarter JP Morgan's net charge-offs, which are loans the bank no longer expects to recover, increased by 6% to $1.56 billion well below expectations. If net charge offs don't materially worsen, JP Morgan will be able to reduce their provisions for losses in coming quarters.
As one money manager put it, betting against the markets is like betting against the US Federal Reserve, against the US Federal government and against our drug companies working on vaccines for COVID-19. If the banks can get through the next six months, business and their fundamentals could materially improve. Analysts project JP Morgan's earnings could jump over 50% next year translating to a stock that trades for just 11 times 2021 estimates. These estimates may be too optimistic, but with the stock trading at a two and a half year low, there is some bad news priced into the stock. This week JP Morgan was upgraded with a $120 price target or 20% above current levels. Other analysts have price targets of $117 and $119 a share while the 52-week high is $140. In the short term, the banking business will remain rocky, but long term investors could see good capital appreciation with a nice dividend to collect along the way.