It would be easy to presume the worst about financial powerhouse JPMorgan Chase (JPM -1.04%). The shares are down 27% from this year's high in early January, reaching new 52-week lows just this week following January's news that the company is ramping up tech spending by $2.4 billion to $12 billion this year. The financial industry powerhouse also said it would reduce its stock buybacks over the course of the next year. In addition, the Federal Reserve is at the start of an interest rate-boosting push in an effort to get rising inflation in check, and the risk of a recession further deflates the bullish thesis for JPMorgan.
But while the big bank and its shareholders certainly have plenty to be concerned about, that doesn't mean investors should shy away from JPMorgan. Trading at less than 10 times trailing earnings, this stock is now too cheap to pass up no matter what the foreseeable future may hold.
With $2.6 trillion worth of domestic assets under its umbrella, JPMorgan Chase is the U.S.'s biggest bank. It has broad exposure to the consumer, corporate, and investment banking markets, as well as a respectable amount of exposure to the wealth-management industry.
That diverse mix of profit centers, however, wasn't enough to prevent its recent stock price rout. Investors are simply too worried about what may happen to its businesses. And those concerns are not completely without merit.
Data compiled by EY indicates that the number of initial public offerings completed fell 37% year over year in the first quarter, and the total amount of money raised was down by 51%. Meanwhile, the Mortgage Bankers Association reports that mortgage applications fell another 8% last week from the previous week. Factoring in the rapidly shrinking refinancing market, and mortgage applications are roughly half of what they were just a year ago, dropping to levels last seen in 2018.
Connect the dots. Two key pillars of the financial sector look like they're starting to crumble.
Except the statistics above can be somewhat misleading if not viewed in context.
Keep the comparisons in perspective
Let's first consider the initial public offering (IPO) market. Last quarter certainly looked lackluster compared to the first quarter of 2021. However, that ignores the fact that Q1 2021 was the busiest quarter for the capital markets business in the past 20 years. And it stayed hot after that. EY notes that Q4 IPO activity was stronger than it had been in any Q4 since 2007, capping off a record-breaking year during which activity recovered from the pandemic-muted conditions of 2020. It would have been surprising if last quarter's capital markets business was anywhere near as busy as any quarter of 2021.
The lending market faces similar conditions. The Mortgage Bankers Association says U.S. consumers borrowed a record-breaking $1.61 trillion in 2021 to buy or refinance homes, eclipsing the previous record of $1.51 trillion hit in 2005. That surge was largely driven by a rush to lock in rates while they were at record lows. Home loan rates have, indeed, been on the rise this year, recently hitting levels not seen in a decade, though they remain below historic averages. Still, it would have been surprising to see last year's outsize mortgage demand persist.
None of that means, however, that the banking industry will struggle. It's just easing back from a wildly good year. Indeed, higher interest rates actually make lending a more profitable venture.
By (or buy) the numbers
Don't misread the message. As was noted, for numerous reasons, 2022 is bound to be markedly less impressive for JPMorgan than last year. All banks will need to adapt to the sudden slowdown, even though these headwinds shouldn't blow for too long and business remains respectable enough in the meantime.
The market, however, is baking too much doubt into the share prices of banks in general, and of JPMorgan specifically.
And that's not just because the stock's slide over the course of the past few months was so much steeper than the broad market's decline over the same period. JPMorgan shares are now back to trading at a price-to-earnings ratio of 9 -- a level near the low end of the range it has moved within for the better part of the past 30 years. Likewise, while the stock's current dividend yield of 3.2% seems just so-so, put things in their proper perspective. That's still above its five-year average of around 2.5%, and at a time when interest rates as well as dividend rates were at historic lows. The forward price-to-earnings ratio of 10.7 is also unusually low for this stock, only bolstering the bullish case.
Make a move sooner than later
There's more to any company than mere numbers. However, when the numbers for a proven blue chip like JPMorgan Chase look so good because investors as a group are more fearful than they need be, those numbers can serve as the centerpiece for a bullish thesis.
Whatever the case, you may want to make a move into this stock sooner than later, because market-wide weakness is prompting more and more investors to swap out their growth stocks for solid dividend payers like JPMorgan Chase.