It's a tough time to be an owner of JPMorgan Chase (NYSE:JPM) stock. Flip open a newspaper, and it seems the bank is almost constantly in the headlines for some new investigation.
As a sign of how bad it's gotten, outspoken bank analyst Dick Bove has referred to both regulatory "McCarthyism" and a "government vendetta" when it comes to JPMorgan. Perhaps an exaggeration, but an illustrative one nonetheless.
While JPMorgan is facing some investigations we haven't seen elsewhere -- the London Whale and its hiring practices in China, for instance -- we have become too used to seeing headlines about banks being investigated. Whether it's Bank of America (NYSE:BAC) being sued by the Department of Justice for selling "toxic loans" or Citigroup (NYSE:C) dealing with antitrust questions in the credit default swaps market, it sadly seems like the normal course of the day to hear about banking shenanigans.
That might seem like a clear signal to not buy a big bank right now. I think the opposite.
Slap-happy with fines
Right now it may seem like there's no other company on earth that gets fined other than major banks. But that's relying a bit too much on the frame of the present. Consider this:
- In 2011, Johnson & Johnson was fined for bribing European doctors. The Securities and Exchange Commission said the company was "using sham contracts, off-shore companies and slush funds to cover its tracks."
- In 2007, Chevron offered a multimillion-dollar payout to, as the Houston Chronicleput it, "settle allegations it knowingly purchased Iraqi oil from companies that were funneling illegal kickbacks to Saddam Hussein's regime."
- Earlier this year, Pfizer agreed to pay out $491 million over charges that its Wyeth unit illegally marketed a kidney transplant drug.
- Even "don't be evil" Google has been caught red handed and agreed to a $500 million settlement with the DOJ in 2011 for allowing Canadian pharmacies to illegally sell to U.S. consumers.
It wouldn't be very hard to find many more examples like these.
This isn't to say that it's OK for JPMorgan to cross the law because everyone else is doing it, too. Instead, the point is, when you're talking about a company with hundreds of thousands of employees (JPMorgan has over 250,000), the statistical probability rises that something untoward is happening somewhere in the ranks.
The recent spotlight hasn't been without cost to JPMorgan's stock. Over the past three months, the stock has fallen more than 5%, while the KBW Bank Index has risen nearly 3%.
This came even as the bank's shares already looked attractively valued. With a current price-to-tangible book value ratio of a hair over 1.3 and a trailing-12-month return on equity of 12%, there appears to be a severe disconnect between the price of JPMorgan's stock and the returns the bank produces.
But more importantly
You may still be scratching your head at this point. After all, I've still only really told you that JPMorgan is a company that's under investigation on multiple fronts and that those investigations have helped push the stock price down. None of that really adds up to a buy in my eyes.
However, what completes the picture is the fact that JPMorgan is a business well worth owning. Or, I should probably say, it's a collection of businesses worth owning.
It may not be seen primarily as a consumer-facing bank like Wells Fargo (NYSE:WFC), but 50% of U.S. households have a Chase relationship. And among the largest banks -- yes, Wells Fargo included -- JPMorgan has been rated the best for customer satisfaction. Its mobile-banking app has been given top honors as well.
Also on the mass-market front, JPMorgan has one of the most dominant credit card businesses. The bank is the No. 1 global issuer of Visa cards and issued 6.7 million credit cards in 2012 alone.
But JPMorgan shines in many other areas that consumers don't see as much. Its corporate banking business counts 80% of the Fortune 500 companies as customers and has a presence in 59 countries. Its investment bank was the top fee earner globally in 2012 -- yes, ahead of even Goldman Sachs. It also has key franchises in commercial banking, asset management, and private wealth management for ultra-high-worth individuals.
In short, this is a collection of businesses worth owning for the long term. Its stock was already selling at what I believed was a discount, and now it's simply selling at even more of a discount.
Whoa there, not so fast!
There are risks, here. In rounding up its litigation risk in its most recent quarterly report, JPMorgan offered up an improbably large range of possible payouts for the investigations currently ongoing. Specifically, it noted "the estimate of the aggregate range of reasonably possible losses, in excess of reserves established... is from $0 to approximately $6.8 billion."
You could pilot a freighter through that estimate! My best guess is that the high side was set excessively high to capture the difficulty of trying to estimate these losses. A full $6.8 billion would indeed hurt; that's certainly a risk. However, it's worth noting that with shareholder equity of $209 billion and trailing-12-month net income of around $24 billion, a $6.8 billion payout would be more of a ding than a crater for the bank.
The bigger risk from all of this is that the collection of businesses I outlined above is impaired. Should JPMorgan be forced to curtail certain businesses, restrict operations in certain countries, or lose key customers as a result of the bad press, that could lead to an impairment much more concerning and long term than a single, large regulatory fine. I think the risk of this happening -- at least to an extent that it drastically alters the value of the company -- is low, but that doesn't mean the risk isn't there.
Taking the plunge
Whether we like it or not, we face risk every time we invest in a company. Sometimes that risk is in plain sight -- as we have with the ongoing legal and regulatory risk at JPMorgan -- and sometimes it's less obvious. JPMorgan has challenges ahead of it, both in terms of cleaning up current litigation and strengthening operations so it doesn't face this again in the future.
But assuming \worst-case scenarios don't manifest, the bank's stock looks like a prime buy today. And that's why I'm adding JPMorgan to my real-money portfolio.