I can list on one hand the number of banks that are in JPMorgan Chase's (JPM 0.24%) peer group when it comes to the quality of management, but that doesn't necessarily mean its stock is a buy right now.

Downside vs. upside potential

The issue is that bank stocks have rallied over the past year. The KBW Bank Index, which tracks shares of two dozen large-cap bank stocks, is up 55% over the past 12 months. JPMorgan Chase itself is up 56%. Meanwhile, the S&P 500, an index of large-cap stocks irrespective of industry, has climbed by a comparatively modest 16%.

JPM Chart

JPM data by YCharts.

Banks have Donald Trump to thank for this performance, as investor sentiment toward the sector improved abruptly following the unexpected outcome of the presidential election. The thesis is that banks will make more money under Trump's administration given his vows to "dismantle" the Dodd-Frank Act and reduce corporate tax rates.

These things would certainly pad banks' bottom lines, including JPMorgan Chase's, but whether they actually come to fruition is far from guaranteed, as we're learning from the struggles to repeal and replace the Affordable Care Act. It's worth pointing out as well that stocks in general are far from cheap right now, trading at one of the highest valuations in history. Consequently, it seems reasonable to assume that there's as much downside risk right now to bank stocks as there is upside potential.

JPMorgan Chase stock

This isn't to say that JPMorgan Chase's shares trade at an unreasonably high valuation. They're currently valued at 14.1 times the bank's earnings over the next 12 months. That compares to average forward price-to-earnings ratios on the KBW Bank Index and the S&P 500 of 15.8 and 23.9, respectively.

But there are reasons for this. First, because JPMorgan Chase holds more than 10% of domestic deposits, it's legally prohibited from acquiring other banks. This closes off one of only two ways for it to grow, the other being through organic growth. Second, though similarly because of the New York-based bank's size, it's subject to stricter rules and regulatory scrutiny, which combine to decrease its revenue and increase its expenses.

Chase branch sign.

Image source: The Motley Fool.

All of this weighs on JPMorgan Chase's profitability. In the most recent quarter, it generated a 1.03% return on assets. That exceeds the 1% threshold that tends to demarcate between well-run banks and the rest, but it's still well below what smaller banks of similar quality are able to earn right now. When looking at smaller elite banks, say those with $10 billion to $50 billion in assets on their balance sheets, it isn't unheard of to see returns on assets of 1.3% or higher.

These issues aside, it's worth underscoring the fact that JPMorgan Chase is one of the best-managed banks in the country. Led by Jamie Dimon, a uniquely prescient banker, it not only survived the financial crisis, but it thrived through it, picking up two major acquisitions for pennies on the dollar. Since then, it has expanded its lead across its commercial and investment banking franchises in particular. And given Dimon's obsession with maintaining a "fortress" balance sheet, it's also fair to assume that the downside risk to owning JPMorgan Chase's shares is minimal compared to its less prudent peers.

The net result is that, while JPMorgan Chase's stock could form the backbone of an investor's portfolio, it seems to me that investors have more to gain than to lose from waiting for a pullback in the market before buying its shares.