Maybe it's a combination of a resilient economic backdrop, solid financial results, and the expectation of the Federal Reserve lowering interest rates. But JPMorgan Chase (JPM -0.13%) has been a huge winner for investors.
In the past 24 months, shares of this money-center bank have produced a total return of 106%. This gain is well ahead of what the S&P 500 index was able to do for investors.
With the stock down 6% from its peak price, set in August 2024, is JPMorgan Chase a buy right now? By looking at the bull and bear cases, investors can make a more informed decision.
JPMorgan is a dominant force
As of June 30, the company had a whopping $4.1 trillion in assets on its balance sheet. And in the last three-month period, it raked in $201 billion in annualized revenue. This is a massive bank that dominates the industry.
Part of the allure of owning this business is because of Jamie Dimon, who has been the CEO since 2006. He is viewed as one of the best executives out there. He deserves credit for navigating the Great Recession and helping build the bank into the diversified financial services provider that it is today, one that has numerous revenue streams in various segments. Having a competent leader is certainly a favorable characteristic for any business to have.
The company has reported strong results in a higher-rate environment. In 2023, revenue and net income were up 23% and 32%, respectively, momentum that has carried over into this year. The market is hoping that lower interest rates going forward can spur lending activity, an area JPMorgan Chase is a leader in. This has the potential to help grow revenue and interest income.
The risks of buying the stock
Investors can easily get caught up in the positive factors surrounding this bank. However, some downside risks shouldn't be ignored. Even shareholders in a dominant force like JPMorgan must pay attention to these.
For starters, banks deal with some level of cyclicality. Changing macroeconomic conditions, whether it's interest rates or unemployment, can have a profound impact on the company's financials. Investors are happy about the prospects of the Fed starting a rate-cutting cycle. However, there's still the possibility the economy will fall into a recession.
And in this scenario, JPMorgan Chase could see investment banking activity decline. It could also register higher delinquencies and charge-offs with its massive $1.3 trillion loan portfolio. No one can predict when the economic tides will turn, so this is also a risk to keep in the back of any bank investor's mind.
Another risk with this business is the competitive nature of the industry. Financial services are hard to differentiate between companies, as they are commoditized offerings. This won't make things easy when trying to bring on new customers, particularly the younger demographic, who might favor services provided by fintech platforms more than the offerings from traditional banks. Of course, JPMorgan has done well enough to get to its current position, but this is something to keep in mind.
After the stock's impressive rise in the past two years, it now trades at a price-to-book (P/B) ratio of 1.9. That's 28% higher than the trailing-10-year average, and it's close to its highest valuation in the past decade. This indicates heightened expectations about the company and its near-term prospects.
JPMorgan is a great business. I don't think anyone would argue with that perspective. But at its current valuation, it doesn't look like a smart buying opportunity. Perhaps if the P/B multiple dips below 1.5, then the situation would become more interesting. But until then, this business is best left on the watch list, in my opinion.
