In this week's installment of Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss the impressive fourth-quarter results from JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS). Plus the pair discusses how investors should react to stock market sell-offs like the ones we're seeing today. Finally, Moser reads some of the latest stocks our listeners bought, and he and Frankel share why they're watching the Vanguard REIT ETF (NYSEMKT:VNQ) and Ameris Bancorp (NASDAQ:ABCB).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 27, 2020.

Jason Moser: It's Monday, January 27th. I'm your host, Jason Moser. On today's Financials show, we're going to dig into the two bank stocks that stood out the most this earnings season so far. We got a listener question from Twitter. We have some more the last stock you bought and why. To help me navigate all of this, it's my partner in crime, Certified Financial Planner Mr. Matt Frankel. Matt, how's everything?

Matt Frankel: Pretty good. I feel like I haven't seen you in forever. It's like every Monday is a holiday or some reason to take a day off.

Moser: The crazy thing is, today is another day off from school for us up here. The kids are between quarters, and so they've got Monday and Tuesday off. But, that doesn't keep us from coming into the office. But, yeah, I mean, it was another holiday. It has been a while. You were at CES, how'd that go?

Frankel: Oh, it was a great time. I was kind of overwhelmed. I hope to go there for more than just a day and a half next year. It was kind of a last-minute thing. I'm glad I got to see all the smart home stuff. That's really helping us out with real estate, just noticing the trends in what people are putting in their houses. More so than work, I found like 500 things I want to buy. Which is kind of CES normally goes.

Moser: Yeah, I can imagine. I've never been to CES. I'm looking forward to heading out to California this May. I'm going to head out to the Augmented World Expo, which is going to be everything the augmented and virtual and mixed realities. I feel like I'll probably be like a kid in a candy store out there.

Frankel: Nice, you should try to make it to CES next year.

Moser: I'm going to give it my best. But we digress, folks. Let's jump into today's show. And before we do jump into this bank discussion, Matt, I did want to just get your take on the market this morning. And it seems like we're not in as great a crisis mode right now as maybe it seemed like we were at 8:45 this morning. But regardless, you wake up on a Monday morning and you see the Dow is selling all 400 or 500 points, and all of this chatter about the coronavirus and potential for global implications there, and the stocks that are going to be hit from this. You see, this this sort of emotional reaction, heavy selling early in the week here. It can be a little bit concerning at times. I'm just wondering, when you wake up on a Monday morning and you see something like this, it can feel like threat level midnight to some. I wonder, for you, how do you react to things like this? What's your check to make sure that you don't overreact when you see headlines like this?

Frankel: When I see the market doing what it was doing this morning, I don't even log into my brokerage account, first of all. It's a good time to take a step back, not make any sudden moves, buying or selling, and just kind of let the emotions settle down. As you mentioned, it's been just over an hour since the market opened, and things already seem to be kind of calming down a little bit. I want to say the futures were down by 500 points on the Dow at one point this morning, and now it's a lot less than that. So, it's a good time to let things settle out. Don't react, don't sell. Whatever you do, don't sell. And just, if your near-term spending needs are met, meaning you don't have any money in the market that you absolutely need to cover any current expenses, there's really no reason to panic over things like this. If anything, it could produce nice bargains in some of your favorite stocks. Let's be honest, the market's getting kind of expensive. So it's a good time to keep a watch list, but don't overreact, don't jump into anything. If in a couple days something looks cheap, it could be a great time to join in. But like I said, I don't even log into my brokerage account on days like this.

Moser: Well, I mean, like they say, ignorance is bliss. Sometimes not knowing is -- I mean, I think that's a great check, though. I mean, you're looking for little heuristics, little ways to be able to deal with things like this. And it's easy to say "don't let the emotions get the best of you," but that's the nature of emotions. We overreact. Emotions are tough to control. And that's certainly something we work on constantly here. So, that's a good insight there. I appreciate you sharing that.

OK, let's jump into this banks discussion, because we've most of the big banks report now for this earnings season, as we're just kicking off. And, I mean, it's a lot of banks, right? I mean, there's a lot of big banks out there, even some smaller banks and some mid-sized banks. But we wanted to focus on the two banks that you felt like really had the most important earnings season. Right? The two banks that really, these were the banks that we needed to pay close attention to, and these were the ones that really gave us the information that we were looking for, stuff that investors need to know. You're going to spotlight two banks here today. We're talking JPMorgan and Morgan Stanley. So, let's just go ahead and start off with JPMorgan. My favorite CEO in the financial space, one of my favorite CEOs out there, Jami Dimon. I mean, I love watching these reports, listening to these calls. You just always learn something new from him. Talk to us a little bit about JPMorgan. What was it that JPMorgan delivered this quarter that you felt was so important for investors?

Frankel: Well, first of all, two things before I get started on JPMorgan. I didn't have very high hopes going into this earnings season. For one, interest rates have been steadily going down in 2019, which is generally a bad catalyst for banks. I mean, banks make their money from loaning money out and charging interest at the end of the day. They have other revenue streams, but that's really the core of the banking business. So, when rates go down, profits go down. So, that was one thing. Trading revenue has been a real sore spot for any bank with an investment division for some time now. And this was the year-end earnings. We got the year-end 2019 earnings. And in 2018, year-end earnings looked great because the banks first got the big benefits of tax reform, which is not a factor anymore. So, I didn't have very high hopes. And on your point, Jamie Dimon is worth every penny that JPMorgan pays. I think they said he got a raise to something like $35 million. And if you ask me, they're getting him cheap. I know I'm going to get some backlash for saying that, but he's an effective leader.

Moser: No, when you say something like that, you just say, don't at me, and then people won't at you, right, Matt?

Frankel: [laughs] Yeah, that always works, just asking nicely. That always prevents it.

Moser: I think it has the opposite effect, actually, but go on.

Frankel: [laughs] But, I mean, just look at some of these numbers. Like I said, interest rates are falling. JPMorgan's deposit margins fell by nearly 30 basis points. But their consumer banking revenue still grew year over year, which I think is a pretty impressive accomplishment all by itself. The bank easily beat expectations for both earnings and revenue. 19% earnings growth year over year. Grew its revenue by 7%. And by the way, when earnings grow faster than revenue, it's generally a sign that a business is becoming more efficient. And that's definitely the case here. JPMorgan's efficiency ratio -- which is how much a bank is spending to get every dollar in revenue. 60% efficiency implies that the bank is spending $0.60 for every dollar of revenue it's bringing in. JPMorgan's dropped from 59% to 55% year over year. If there's a good way to combat declining interest margins, it's to improve the efficiency of your operations. And they did a great job with that. Looking a little bit further, I mentioned trading revenue has just been a sore spot throughout the banking industry for a while now. And that's not the case anymore, especially in JPMorgan's case. Bond trading revenue, which has been really the sore spot, was up 86% year over year. It really surprised everybody.

Moser: I saw that, and I was wondering -- I mean, that to me, that's really a product of this low interest rate environment, though, right? I mean, that's a lot of companies getting out there, trying to raise some debt, taking advantage of this low interest rate environment. I mean, that's something that can be a driver for that part of the business, right?

Frankel: Sure. And a lot of it's because interest rates have not just been low, but they've been kind of volatile lately. Volatility generally boosts trading. For example, when the stock market's volatile, you'll see equities trading jump up. When interest rates are volatile, it's a nice catalyst for bond trading revenue. And they were expecting a jump, but not like this. And if you look through the numbers, it's tough to find anything I didn't like. A 9% increase in credit card and auto loan revenue. Their deposit base grew by 7% year over year, which is really good for any year in any bank. Wealth management revenue grew by almost 20% year over year. And some of that's stock market performance, but a lot of that is new money coming in. Produced a 15% return on equity, which is a phenomenally good number, especially because last year was 13%. It's really rare when you look through a bank earnings report, especially a bank that's as big and diversified as JPMorgan Chase, and don't find anything really to complain about. And this was one of those quarters. That's why they're one of my two winners of earnings season here.

Moser: OK, now let's flip the discussion over to Morgan Stanley, a bank that probably doesn't get as much coverage in the Foolish universe as some of the other big banks, yet still a very important one, and one that obviously stood out to you. So, what did Morgan Stanley deliver this quarter that caught your interest?

Frankel: Well, just like JPMorgan, there was very little to be disappointed about, but a lot of the numbers were even better, if that's even possible. I wrote a piece a little while ago calling them the winner of fourth quarter bank earnings, and that was after I heard JPMorgan, so this is including them. They grew their revenue by 27% year over year. JPMorgan's was 7%. Earnings growth 63% year over year. Bond trading more than doubled, 126% year over year growth, and came in 36% ahead of what analysts had been looking for. That's not just a beat. They blew the expectations out of the water.

Moser: Yeah, that's a shellacking.

Frankel: Right. No one expected that. Investment management revenue doubled year over year, 98% growth. And the big thing that I loved about Morgan Stanley, they, with their earnings report, released kind of a strategic map of where they're going. And we've talked about it before on this show that the two big investment banks, Goldman Sachs and Morgan Stanley, are both kind of trying to embrace mainstream banking, but in different ways. Goldman, we know, is doing the Marcus, the savings and loan platform. They're going to roll out a few other things. They did the Apple card, Morgan Stanley's doing more the wealth management for Main Street stuff, too. One of the things that they highlighted that they want to do is convert workplace retirement plan participants into active wealth management clients. Right now, they have about 5,000 participants that they've converted the clients. They're saying within five to seven years, that's going to get to a million. 5,000 to a million within a year. Right now, 5% of their employee participants have been converted to one of their big programs that they have going. They want 100% of their addressable client base by 2021 in this program. So, their wealth management business is not just for the rich and powerful anymore. They have 2.7 million participants in employee stock plans. And that gives them a huge client base to potentially convert to wealth management clients. And they laid out a nice blueprint on how to do that. I mean, I just ran down the fourth quarter numbers, which were impressive, but their vision, if they can achieve it, this could just be the start.

Moser: OK, I'm going to put you on the spot here, as I love to do. When we look at JPMorgan, we look at Morgan Stanley, we can call them two big banks, but JPMorgan is considerably larger. I mean, we're talking about a $415 billion company here in JPMorgan versus around $85 billion or so for Morgan Stanley. So, Morgan Stanley's a much smaller bank. Both obviously performing very well. If I asked you to rank the two today, what do you put in the No. 1 slot for investors there versus the No. 2?

Frankel: If I were going to buy one today, if I didn't own any other bank stocks already, it would be JPMorgan. It's just a great backbone bank of the banking industry. But I think Morgan Stanley has the most upside potential over the next decade of all the big banks, I would have to say, based on this. If they get it right. There's a lot of execution risk in their plan, don't get me wrong. You don't get from 5,000 wealth management clients to a million without a lot of execution risk and a lot of things having to fall in your favor. But having said that, they just have a ton of potential, and this is a really untapped market for them. And like I said, they're going after Main Street in a different way than Goldman. So, out of the two, I would say Morgan Stanley is the better buy today.

Moser: Okay, I appreciate that. And I appreciate you pointing out that execution risk. Always a nice thing to remember -- when you see management teams lob up these lofty goals, they sound great, but let's also remember to take it with a little bit of a grain of salt and understand that there is always some execution risk there. And that is certainly the case here.

OK, let's move on to our listener question this week. We got a question on Twitter a couple of weeks back. A gentleman, goes by the handle @r8rdad. I think it's supposed to be "Raiderdad," so I'm assuming he's a Raiders fan. I don't know how he's feeling about that move to Vegas, but hey, we'll talk about that another time. But, @r8rdad, it's in regard to a tweet he saw regarding an office building that was being raided by law enforcement due to an investigation. And so, it prompted this question. He said, "I just saw this tweet and was wondering how I can find out if this shady outfit is a holding in any REIT I own or may want to own. Any suggestions would be appreciated. Thanks." And then he throws a nice little P.S. in here, Matt. He says, "P.S., I love your work on The Motley Fool podcasts. Keep up the great work." Raiderdad, listen, thanks for those kind words. We really appreciate it. And it's worth noting, he sent this question to you and me, Matt. So, I think we thought that it would be a great one to tackle here on the show. I think there's a pretty good information out there regarding REITs and what they hold. But, what would you say here to Raiderdad? Where can he go find more information regarding REITs and what they hold?

Frankel: First of all, I hope he still feels that way when he finds out I'm an Eagles fan.

Moser: [laughs] I'm sure he's OK with it.

Frankel: But I will say, first of all, if there is a toxic tenant situation, which sounds like what he's referring to here, if a REIT doesn't have any exposure to them in their portfolio, they will usually make that well-known. I'll give you an example. Empire State Realty Trust is my biggest REIT holding right now. They own the Empire State Building and a bunch of other office real estate in New York City. We all know how the WeWork IPO went, or the non-IPO. One of my biggest concerns was, this is an office REIT in New York City, did they have any exposure to WeWork? They came out almost immediately saying, "We don't have anything to do with this. We don't lease to co-working spaces." And that's the exact right thing they should do. If they don't have any exposure, make that known. Settle these questions before they're asked. If whatever REIT you own doesn't say that, in order, first go to their investor relations site. You'll usually see a tab toward the top of the page that says portfolio. You could usually get details about the individual properties your REIT owns there. I'd say about 90% of questions like that could be settled by just going to the IR site and looking at the portfolio. Beyond that, the annual report is a really good source. Usually it'll list some of the top tenants, things like that. And if all else fails, there's usually a contact box on the investor relations site where you can directly ask the question, "Do you have exposure to this tenant?" And in my experience, they usually get back to me fairly quickly if I ask them questions like that. So, in order, I would say, go to the investor relations site and just look at the portfolio; check the annual report or other SEC filings detailing the portfolio, but that's a little more legwork; and if all else fails, contact the investor relations team.

Moser: Well, all very good options. We appreciate you taking the time to dig into that, Matt. Raiderdad, I hope that was helpful. Thanks for the question and for the kind words. That is why we're here. So we're going to keep doing it as long as they let us.

OK, Matt, we're going to jump into another installment of the last stock you bought and why. Given that we've had these holidays and interviews and whatnot, we've got a nice little pipeline building up here of everybody chiming in with the last stocks they bought. But we're going to kick it off here with Robert Leonard @robertatip. He said, "Albeit a small position, I bought a few shares of," you're going to love this, Matt, "Green Dot for all the reasons you guys talked about on the show and as an addition to my war on cash basket." Good call there, Robert, on the war on cash basket. You know, we feel like Green Dot is set up for a better year this year. So hopefully we'll see that company moving on the up and up.

Jay Shah @jbs5 says, "The last stock I bought is Etsy. It's my opening position, and plan to add more if it goes down. Unique experience and always like the experience when using the platform. Hoping I am making @TMFJmo proud." And yes, Jay, you are. Let me tell you, you know how I feel about Etsy. Big fan. I own it myself. I find it to be a very unique network. I think they've done a very good job of demonstrating that they are at least pretty Amazon-resistant. Maybe not fully, but pretty, pretty, pretty Amazon-resistant.

And finally, [...] says, "The last stock I bought, after Motley Fool's information and podcasts, I finally opened accounts for my toddlers at two and five." Very well done! "I bought stocks for the future I envision for them. A thriving Africa, Jumia. Decriminalized weed, OrganiGram. And space travel, Virgin Galactic." And he wraps it up with, "Next, less risky stocks." Good observation there. Those are probably some riskier holdings. But I do like the idea there, particularly buying those stocks for your toddlers. At that age, I mean, time is really of the essence for these companies. And I think that these kids are going to have a lot of time to watch these businesses sink or swim. What do you think, Matt?

Frankel: I think Virgin Galactic is definitely one I would buy for my kids. Not necessarily for myself, but I think they'll be there to see the fruits of the labor there.

Moser: Yeah, space is a really cool investment. We were talking about this last week. It's an amazing situation, because you don't have a whole heck of a lot in the way of investable ideas out there today, but what you can see is that the money that is being plowed into this space, no pun intended, it's going to create some serious barriers to entry for when this does become a more material opportunity. But financially, the barriers to entry, the finance, the capital involved, and really the know-how, a very unique market, and one that I think has a lot of attractive qualities here over the next 10, 20 years.

Frankel: Yeah, definitely. And never want to bet against Richard Branson. That's a bad idea.

Moser: No, no. Him, Elon Musk, Jeff Bezos, don't bet against them. I mean, if you don't want to invest in it, don't invest in it. But don't bet against them. There's easier bets to make out there, for sure.

All right, Matt, let's wrap it up for this week with our ones to watch. What stock are you watching this coming week?

Frankel: Mine is an exchange traded fund or ETF, it's the Vanguard REIT ETF. Ticker symbol is VNQ. If you're worried about what the market's doing right now, the volatility, I've said a few times that there's a lot more that can go wrong in the market than go right. We said that on the 2020 predictions show. REITs tend to hold up a lot better during volatile markets and market crashes and recessions than most. They thrive on low interest rates. The current consensus, the market's pricing in two rate cuts in 2020. Which, one of my bold predictions would come true if that happened. And, just kind of look at the performance today. The fund was down less than 0.5% before we started recording; the S&P was down 1.5%. It reacts less to market news. It's more considered a safety play. It's a safety play that can make money in good times and protect you in bad times. So it's really a good one to watch if you're concerned that this might just be the tip of the iceberg when it comes to the sell-off.

Moser: All right, good stuff. Well, I'm going to go with a familiar name for listeners, Ameris Bancorp, ticker ABCB. Ameris reported earnings late last week. I think everything was really looking like it's all going in the right direction. Relatively new CEO Palmer Proctor, there was some language he used in the call which leads to why I like this investment, really. He says, "You'll see us become more active but not aggressive." Being active is different than aggressive. Aggressive is writing bad business, right? And that's what you don't want to see, is banks, insurance companies trying to get in there and take business that's of lower quality that they might not normally take. And in lending, obviously, that's a really big deal. They grew tangible book value for the year 10.5%, and just modestly for the quarter. But now you're talking about a company, a bank that has tangible book value of close to $21 per share now. They'll continue to focus on their four core strategies, which is the deposit funding, asset quality, becoming more efficient, as you noted earlier, banks really focus on that in these tougher times as well, and also growing that tangible book value metric. So, we'll continue to follow those metrics and make sure that they're living up to their words. Improvement in the deposit mix now. Non-interest-bearing deposits represent 30% of total deposits. That's up from 26% a year ago. And remember, that was part of the logic behind this big Fidelity acquisition. And so, that lower-cost deposit base helps on that efficiency and profitability side. And you exclude that Fidelity acquisition, they grew total deposits 3.5%. They now stand, total deposits just over $14 billion. So, again, a bank that I think continues to do well in difficult times. They just made a very big acquisition, the largest of their history, that seems to be going fairly well. It's a stock that I still own, and I will continue to own, and I felt like going through that earnings report that it was another productive quarter for Ameris Bancorp. We'll leave it at that, Matt. I appreciate you taking the time to join us this week. It was nice to get back together.

Frankel: Yeah, I'll see you next week. And I'll see you in person three weeks from today. I know you're counting the days.

Moser: I mean, I'm just marking them off on the calendar, actually. A day goes by, put an X on the calendar, then the next one. Just looking forward to it, man, looking forward to it.

As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks to Austin Morgan behind the glass for keeping us on the straight and narrow this week. For Matt Frankel, I'm Jason Moser, thanks for listening and we'll see you next week!