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Should Value Investors Be Watching JPMorgan Chase?

By Bram Berkowitz - Feb 5, 2021 at 7:00AM

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The bank has rarely traded below tangible book value over the last decade, but there could be an argument that it is undervalued even with its high valuation.

Value investing by its formal definition is looking for stocks that appear to be trading for less than their intrinsic or book value. By that definition, JPMorgan Chase (JPM -1.48%), America's largest bank by assets, is certainly not a value stock. However, value investors with a less formal perspective may simply be looking for stocks that they deem to be insufficiently appreciated, and there could be an argument that JPMorgan fits into this category. Let's take a look.

The bank typically trades at a premium

Book value itself isn't the best way to look at the intrinsic value of a bank. Tangible book value is better because it factors out intangible assets that are hard to put a number on, like goodwill. JPMorgan hasn't traded below tangible book value since around the beginning of 2012. In fact, the company looks a lot more like a growth stock over the past decade, appreciating more than 230% from the beginning of 2010 to the end of 2019.

JPMorgan has done pretty well during recessions, all things considered, faring better than any of the other big four banks during the Great Recession and the coronavirus pandemic. While the bank's earnings in 2020 dropped from 2019, JPMorgan still generated $29.1 billion of net income after reserving heavily for potential loan losses. Furthermore, even in March 2020, when stocks were getting creamed because of the pandemic, JPMorgan's share price didn't drop below tangible book value. At Thursday's prices, the bank traded at around 200% of tangible book value.

On all of these accounts, JPMorgan is not a stock value investors should be watching. 

The exterior of a JPMorgan Chase branch on a city street

Image source: JPMorgan Chase.

Are shares undervalued?

But this isn't the only way to evaluate a bank stock. Prior to the pandemic, it was rare to find good banks trading below tangible book value. And in this regard, there may be an argument to be made that JPMorgan is undervalued and should be trading at an even higher premium.

Many investors and analysts, myself included, consider JPMorgan to be one of the best-run banks in the world, if not the very best. Its CEO, Jamie Dimon, has long been an industry leader, and it's really good at almost all aspects of banking. It runs a top-notch consumer bank with a big credit card business, an investment bank that's always around the top in market share, and a strong asset and wealth management division, among other business segments. In fact, not too long ago, Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, called JPMorgan the Apple of banking.

Despite its high valuation, I could see an argument for JPMorgan being undervalued in two ways.

For one, does JPMorgan have a valuation that would justify calling it the Apple of banking? The bank has a trailing price-to-earnings (P/E) multiple a little over 15. If you look at other well-known companies that dominate their perspective industries and have great brand names, like Apple, Coca-ColaJohnson & Johnson, or Amazon, they have much higher P/E ratios, well into the 20s and 30s and higher. Now obviously, banking is a completely different animal with its regulations, business model, and wonky accounting, but I would argue that JPMorgan has not gotten the same high valuation as other dominant players in other industries.

The other argument I could see being made about JPMorgan being undervalued is how far the bank has come from a technological perspective. In 2020, the bank spent $10.3 billion on technology, communications, and equipment. It has a big blockchain operation now and has all of the same capabilities or could easily build all of the same capabilities as any fintech out there. The market has rewarded fintechs and tech companies with much larger valuations than your standard commercial bank. Even banks that are doing innovative things with technology or blockchain can be valued at much higher levels than 200% of tangible book value.

Value? No. Undervalued? Possibly.

In conclusion, if you follow a very stringent approach as a value investor and only look for stocks trading below their intrinsic value, JPMorgan certainly isn't one of those. The bank has rarely traded below tangible book value over the past decade.

But if you, like me, believe that shares of JPMorgan might be undervalued because it is a leader in all aspects of banking and has incredible technology capabilities, then the bank might be a good buy even with its high valuation.

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