If you're a long-term investor and one of your goals is to buy low and sell high, then the sharp decline in stocks since the vote in the United Kingdom last week to separate from the European Union offers an opportunity to purchase JPMorgan Chase (NYSE:JPM) stock for 13% less than its price at the beginning of this month.
This doesn't necessarily mean its stock is cheap, but it does mean its shares yield a respectable 3.22%, which comfortably exceeds the average yield on the S&P 500 of 2.17%. If you're going to take advantage of the recent drop in JPMorgan Chase's share price, though, you'll want to dollar-cost average into your position.
Let's say, for example, that you have $6,000 available to buy shares of the nation's biggest bank. As opposed to using all $6,000 of that right now, you should break it into three chunks of $2,000. Invest the first slice this week, the next slice next week/month, and the final slice a week/month after that. This will allow you to benefit if its shares continue to fall, while still giving you the opportunity to get in now if they rise instead.
To be clear, the Brexit vote isn't good for bank stocks, and JPMorgan Chase in particular. It will weigh on the bank's top line by reducing its trading and investment banking income. It will also likely fuel the Federal Reserve's hesitation to raise interest rates, which will keep JPMorgan Chase's net interest income suppressed.
The vote could even lead to a recession in the United States if the now stronger dollar has too big of a negative impact on exports and profits earned abroad by U.S. companies. This would reduce loan demand and push up loan default rates, both of which would eat into JPMorgan Chase's profit.
If the United Kingdom goes through with the separation, moreover, it could temporarily increase expenses at JPMorgan Chase, too. This follows from the fact that the $2.4 trillion bank will have to relocate some of its London-based staff to the continent. The elevated expenses would be temporary -- and modest in the context of JPMorgan Chase's top-line revenue -- but it's still an issue.
Importantly, even though JPMorgan Chase is likely to take a short-term hit from a Brexit, the impact should pale in comparison to what we saw during the financial crisis. JPMorgan Chase has much more capital today than it did going into the crisis, which reduces any threat of insolvency and eliminates the possibility it will have to raise new capital, which would dilute the ownership interest of its existing shareholders.
JPMorgan Chase also has much more liquidity now then it did prior to the crisis. It holds $602 billion worth of cash and equivalents on its balance sheet, according to Yahoo! Finance. This insulates it from even the worst-case funding scenario in which credit markets freeze, as they did following Lehman Brothers' bankruptcy in 2008.
We saw how well these things protect JPMorgan Chase last week when the Federal Reserve released the results from the first round of this year's stress tests. The scenario underlying the test presupposed, among other things, that the unemployment rate rises to 10%, stock prices fall by 50%, and interest rates turn negative. This is every bit as bad (and then some) as the financial crisis, which was the worst downturn since the Great Depression.
Despite the severity of these assumptions, JPMorgan Chase emerged from the Fed's gauntlet with an 8.3% tier 1 common capital ratio, which is well in excess of its regulatory minimum of 6.25%. As I discussed last week, this means it had $31 billion in excess capital, even after the Fed assumed it would lose $30.5 billion through the nine-quarter scenario.
It's also worth noting, as Rafferty Capital Markets Dick Bove pointed out to me last week, that U.S.-based universal banks such as JPMorgan Chase could ultimately benefit from Brexit. This would follow from the realistic possibility that the European universal banks would be so consumed with navigating the separation that they would be less aggressive when it comes to competing for market share.
All of this being said, JPMorgan Chase's stock isn't a screaming bargain in light of the uncertainty we currently face. Even after falling by 13% since the beginning of June, shares still trade for a 17% premium to the bank's most recently reported tangible book value. You'll know it's a bargain if and when this dips below tangible book, or $49 per share.
Either way, investors looking to buy into great stocks with above-average dividend yields will want to dollar-cost average into a position in JPMorgan Chase stock.
John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.