JPMorgan Chase & Co. (NYSE:JPM) is the nation’s biggest bank by assets. Visa Inc (NYSE:V) is the world’s largest payments operator. A diversified portfolio of financial stocks would include both these names, but that doesn’t mean one isn’t a better bet than the other.
The financial sector has been lagging the broader market for some time now. To put it in perspective, the Financial SPDR (NYSEARCA:XLF) has matched the market’s performance for past 52 weeks, but lags by a significant amount over the last three and five years.
A slowdown in the housing market is weighing on banks, as is sluggish growth in commercial lending. Trading desks — usually a fountain of profitability — have been less productive because of sleepiness in the fixed-income market. New federal regulations stripped banks of lucrative proprietary trading operations and hedge funds, while rock-bottom rates hurt net interest margins.
In some ways, it’s amazing JPM has done as well as it has over the last few years. Visa, meanwhile is insulated from the myriad problems affecting banks. After all, Visa isn’t a lender. It simply in the business of facilitating the transfer of funds electronically. Business has been robust and so Visa stock has been a market-beater for some time.
But that’s all in the past. As for which stock will perform in the future, it’s a tough call, but based on valuation and fundamentals, a clear winner does emerge.
Visa (V)
The market is essentially flat for the year-to-date and Visa stock hasn’t done much better. Farther back, however, V has been a market-beater. Indeed, it’s outperforming the S&P 500 by almost 5 percentage points over the last 52 weeks.
That outperformance does come at a price, however. By a number of valuation measures, V looks too pricey to commit fresh capital at current levels. Visa trades well above its own five-year average on a trailing and forward earnings basis. It’s also significantly more expensive than peers. The same comparison shows V stock to be expensive by price-to-sales, too.
Bulls say that Visa has more than enough growth ahead to justify paying a premium for shares now. Sure, valuation reverts to the mean over time, but a stock can remain over- or underpriced for years before it happens. As the world shifts increasingly to electronic payments, Visa wins. And now the rise of mobile payments opens up a new way to get in on the merchant-consumer relationship.
On the bear side of the equation, the economy is doing well these days — especially the labor market — but consumers don’t spend like they used to. Furthermore, interest rates will rise at some point, and that will have an impact on borrowing and spending. In some ways, Visa looks priced more for the past five years than it does for the the next five.
JPMorgan Chase (JPM)
Years of legal settlements stemming from the financial crisis, low-to-no revenue growth, heightened regulatory oversight and sluggish economic expansion have taken a toll on bank stocks like JPMorgan Chase. In some ways, the return to normality after the financial crisis has made it much harder to impress the market.
After all, a few years back it was easier to report huge strides in net income, as banks were able to release increasingly large portions of their loan-loss reserves. That process has largely run its course, however, and there has been precious little to take its place.
Even the housing market has failed to stoke JPMorgan’s income statement. An uptick in mortgage rates and house prices — as well as more cautious footing on the part of home builders — took some of the starch out of the origination market. Household formation remains low. Heck, total mortgage origination volume at JP Morgan declined by 53% last year vs. 2013.
Fortunately for new money, all this negativity has JPM stock trading at a discount. It’s essentially in line with its own historical multiples by trailing and forward earnings, and is significantly cheaper than the rest of the banking industry. The global economy at long last looks to be stirring. By the time the effects of a rate hike are fully digested by the market, that valuation could have JPM poised for outperformance.
Our Second-Round Pick: Visa
JPMorgan is the cheaper stock and that makes it the better bet for long-term investors, but in the shorter term you’ve got to go with the hot hand. Visa stock has years of momentum behind it. As much as they shouldn’t, investors love to chase performance.
Besides, Visa really does have a strong growth trajectory, and that should only speed up as spending picks up in Europe and perhaps Japan. Additionally, we’re very much in the early stages of mobile payments, which should explode in popularity sooner rather than later.
JPMorgan should get back to its market-beating ways after the rate hike, but for the shorter term at, least Visa should continue to smoke JPM, as well as the S&P 500.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
