Title: Deciding on JPMorgan Chase: Invest or Pass?
In the current investment landscape, businesses capitalizing on artificial intelligence (AI) trend are often in the spotlight. Yet, unsuspecting companies like JPMorgan Chase have managed to deliver stellar performance.Take a look at JPMorgan Chase (JPM), a money-center bank that has generated a remarkable total return of 93% in the past 24 months (as of Dec. 10). For comparison, the S&P 500 only managed a total return of 57% during the same period.
So, is JPMorgan, which trades right off its record high, a buy, sell, or hold-worthy investment option?
The case to buy and hold
Investors are likely well-acquainted with JPMorgan, one of the world's leading financial services organizations. Here are four compelling reasons to consider investing in the stock:
- Jamie Dimon, JPMorgan's CEO since 2006, is widely regarded as one of the best executives of the past two decades. Despite the challenges presented by the Great Recession, he steered the company to success, turning JPMorgan into the powerhouse it is today.
- JPMorgan boasts a diverse revenue stream, with a presence in various segments such as consumer and commercial banking, capital markets, and asset management. This diversity not only adds resilience but also ensures stability, as strength in one segment can offset weakness in another.
- The company's substantial economic moat is another persuasive reason to invest. JPMorgan's sheer scale allows it to distribute fixed costs across an extensive revenue base, leading to sustained profits and profitability. Its worldwide reputation as a reliable and trusted brand also attracts new customers.
- JPMorgan's latest financial results are noteworthy. In Q3, the company reported a 7% year-over-year increase in revenue, with diluted earnings per share (EPS) dipping just 1%. Meanwhile, a leading competitor such as Bank of America reported a 0.7% revenue increase and a 10% decline in diluted EPS in Q3.
The arguments for maintaining ownership of the stock are similar to those for purchasing it. The aforementioned strengths - competent and proven CEO, diverse business lines, competitive advantages, and solid financials - continue to make JPMorgan an attractive investment.
Why JPMorgan shares are a sell
Despite its many merits, JPMorgan presents some reasons for caution.
- High Valuation: As of this writing, the shares trade at a price-to-book (P/B) ratio of 2.1 and a price-to-earnings (P/E) ratio of 13.5. These represent some of the most expensive valuations the stock has carried in the past three years. The possibility that the returns to come may fall short of expectations for such high-priced shares should be of concern to investors.
- Cyclicality: Banks tend to experience cyclicality, making their shares a potential risk. Factors such as unemployment and shifts in consumer spending and corporate investment can impact the economy negatively. While lower interest rates can boost the market's enthusiasm, the threat of a recession remains ever-present.
If a recession were to occur, JPMorgan's loans portfolio of $1.3 trillion would be one of the first casualties, as increased defaults and reduced earnings or even losses could be likely consequences. Predicting economic downturns may be impossible, but investors should consider this potential risk.
JPMorgan's stellar reputation and success may lead many to label it as a high-quality company, and this assessment would hardly be controversial. However, the valuation may be steep, leading shareholders who have benefited from strong gains in the past couple of years to reconsider their investment decision.
Given JPMorgan Chase's strong financial performance and the arguments for its long-term potential, some investors might consider reinvesting their profits from the bank's stellar returns into other financing opportunities, such as alternative investments in the finance sector or exploring new areas of investing in technology or green energy.
On the other hand, the high valuation of JPMorgan shares may prompt some cautious investors to rebalance their portfolios, considering divesting a portion of their holding to allocate funds towards more undervalued stocks in the market, thereby diversifying their investment portfolio and potentially maximizing returns over the long run.
