At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Words to invest by
Once upon a time, a reporter supposedly asked famed bank robber Willie Sutton why he went around robbing banks. The answer: "Because that's where the money is." And according to the smart stockpickers at Standpoint Research, one banking stock in particular is so cheap right now, it's like taking candy from a banker.
Yesterday, ace independent analyst Standpoint initiated coverage of JPMorgan Chase (NYSE: JPM) with a buy rating. It's not hard to see why. Take a look for yourself, and see how JP stacks up against the competition, pricewise:
|
Company |
P/E |
Growth Rate |
Price-to-Book Value |
|---|---|---|---|
| Bank of America | 797 | 15% | 0.40 |
| Goldman Sachs | 25.5 | 12.2% | 0.89 |
| Wells Fargo (NYSE: WFC) | 11.1 | 9.8% | 1.27 |
| Citigroup | 9.2 | 9.6% | 0.55 |
| JP Morgan | 8.8 | 7.6% | 0.85 |
P/E and growth rate data courtesy of Yahoo! Finance; free cash flow from S&P Capital IQ.
By at least one measure, JPMorgan is the biggest bank in America. It throws off loads of cash and boasts an envy-inducing 31% operating profit margin. Yet at 8.8 times earnings, the stock's arguably the cheapest too-big-to-fail banking stock out there today.
However, Standpoint argues that if you price JP at eight or nine times the $5-plus per share that it should earn in 2013 and 2014, the stock's worth at least $48 a share, or 20% more than what those shares cost today. What's more, that's not even an aggressive target. A $5 profit would only require JP to grow 2011 earnings by 11% or so, yet all Standpoint is asking for is a multiple of eight or nine times for that growth.
That hardly seems unreasonable. Consider, too, that JPMorgan pays its shareholders a 2.6% dividend yield -- at least a full percentage point more generous than the second-best dividend payer on the list above (Wells Fargo). With that income stream in hand, I suspect a lot of investors will be willing to wait around and see how Standpoint's recommendation plays out.
Thank you, Standpoint. May I have another?
Indeed, JPMorgan could pay off even better than the 20% gain that Standpoint predicts. As the analyst points out, other hard-hit victims of the recession, such as homebuilder stocks, have enjoyed "50%-100% [gains] off their low points from 2011." If worries similar to those that dragged the builders down are still troubling JPMorgan skeptics, then a similar bounce -- up to, say, the 11-times earnings valuation that rival Wells Fargo enjoys -- could easily double the returns on a share of JPMorgan Chase.
Is it worth the risk? Personally, I'm still too uneasy about the situation in Europe to want to invest in any banks. But that's just me. If you agree with Standpoint and Willie Sutton that the best place to seek profit is "where the money is," then JPMorgan at least looks like the cheapest way to get there.
Have you been burned by the financial sector before? Not quite ready to jump back into risky stocks just yet? Can't say as I blame you. In fact, maybe a better idea is just to stick with some nice, steady, non-banking dividend stocks for now. Read our new report (it's free, by the way), and we'll tell you all about 11 companies we've found with "Rock-Solid Dividends."
