It isn't often that I feel highly confident about a particular stock. Generally there's some deficiency. Either I don't trust the underlying company's growth prospects, or I think the stock is trading for an unreasonable multiple of income or book value. Indeed, for obvious reasons, it's rare when a stock satisfies both concerns at the same time.
I believe there is one such stock in the market right now that offer investors impressive growth prospects without the premium price tag. It's a well-known leader in its industry, and for a variety of reasons, it's trading under the cloud of an irrational loss of investor confidence -- the operative word here is "irrational."
One big bank that's worth the money
If there's one industry that's currently suffering from a lack of investor confidence, it's the financial industry, and the "too big to fail" banks in particular. The largest of our financial institutions have been under siege since the onset of the financial crisis. The media, including me, has pilloried companies such as Citigroup
From an investor's perspective, and to speak very generally, the concerns are threefold. First, there are regulations coming down the pike that may affect profitability. The best known is the so-called Volcker Rule, which bans banks from using depositors' money to make speculative bets. Second, investors don't trust the quality of bank balance sheets. As I discussed recently with respect to Citigroup, there are billions of dollars in toxic mortgage assets that the largest banks must still recognize as losses. Third, there's widespread concern about the situation in Europe, and the possibility that it may produce another "Lehman-type" moment.
As a result of these concerns, many bank stocks are trading for a fraction of their corresponding book value. The two most notorious are Bank of America and Citigroup, both of which trade for less than half of book value. On the other end of the big-bank spectrum is the famously conservative Wells Fargo
To cut to the chase, the latter institution, JPMorgan, is the one I believe presents a rare and potentially lucrative buying opportunity for investors. In addition to the concerns I've mentioned, a multibillion-dollar trading scandal earlier in the year sent shares in the bank plunging more than 20% since the end of March. According to its most recent quarterly filing, losses from the scandal now amount to nearly $6 billion and have left investors wondering whether the bank, famous for managing risk, has lost its touch.
Yet these concerns have overshadowed two important facts. First, despite the trading mishap, the bank is extremely profitable. If you remove the division responsible for the trading losses, for the first half of the year, the bank's other five divisions earned a total of $12.7 billion. Second, and ultimately of more significance, the bank is positioned to dominate its industry going forward. At one time, there were five big investment banks. After Lehman's collapse, however, there are now only four, two of which, Merrill Lynch and Bear Stearns, were swallowed up by Bank of America and JPMorgan, respectively. For JPMorgan and its shareholders, in other words, it's likely that the financial crisis will ultimately turn out to be a blessing in disguise.
The bottom line
Because I write about the financial industry, I understand and appreciate investors' fear about owning its stocks. Yet it's a mistake to paint the entire industry with the same broad brush. Quite simply, I've rarely been as confident in the future prospects of a company as I am in JPMorgan's.
To learn why our financial-sector editor and analyst, Anand Chokkavelu, also believes Bank of America may be flashing a huge "buy" signal, check out our premium investment report on its stock today.