The question facing big bank stocks like JPMorgan Chase & Co. (NYSE:JPM) is similar to that facing the market as a whole. How much upside really is left after a rally that’s now over nine years long? The JPM stock price today sits 176% higher than it did at the beginning of 2010 — an average return of roughly 13% a year. JPMorgan stock has gained 74% just since the beginning of 2016.
At some point, that rally would seem likely to reverse. JPM stock did stumble in February, but it’s already recaptured those losses. Indeed, it trades just a point or two from its all-time highs.
Despite those gains, however, it’s not as if JPMorgan stock looks all that expensive. In fact, it looks rather cheap. JPM trades at less than 12 times forward earnings, though a 1.75 price-to-book ratio ratio is the highest since the financial crisis. And the news surrounding JPMorgan Chase looks good as well. Fed rate hikes should help spreads, and profits. The loan book seems solid; 2018 should be an extremely solid year in terms of earnings growth.
Even with the big gains over the past nine years, then, there’s still reason to see more upside in JPM stock — as long as the economy cooperates. So, for investors bullish on the macro picture, JPM and one of its big-bank rivals both look like attractive plays at the moment.
The Case For JPMorgan Stock
The bull case for JPMorgan stock is relatively easy to make. Earnings have grown steadily since the financial crisis, with 2017 adjusted earnings per share rising a healthy 11%. New regulations in the sector, notably Dodd-Frank, have drawn criticism from bank CEOs and investors. But they’ve also de-risked the sector, with credit ratios still strong across the industry.
Looking forward, there’s more optimism toward revenue and earnings. Fed rate hikes should help net interest income. Non-interest income is guided to rise a solid 7% this year, per a recent company presentation. JPMorgan still is number one in investment banking. Its Sapphire Reserve card has been a huge hit, taking share from American Express Company (NYSE:AXP). And the credit card business remains strong overall, with charge-offs guided to a healthy 3.25-3.5% next year.
Add to that the benefits of tax reform and the near-term picture looks very strong for JPM stock. Analysts are expecting 27% EPS growth in 2018, and another 10% in 2019. Yet the JPM stock price today implies a less-than-12 multiple to 2019 EPS — which, in turn, suggests that earnings growth is going to stall out. At the moment, that seems far too conservative.
What Can Go Wrong for JPM Stock
Of course, stocks aren’t valued solely on their near-term prospects. And there are risks here. Most notably, there’s the question of whether the economy is due for a recession of some type at this point. Come 2019, the current nine-year expansion would become the longest ever. There are fears in certain areas — among them auto loans — that low interest rates led to potentially risky lending. The same normalization of rates helping net interest income could also lead to more defaults in consumer, or even corporate, loans.
Broadly, then, the risk to JPMorgan is somewhat similar to that facing an equity market near all-time highs after a big run. Have the gains been too much, too fast? And is a correction on the horizon, perhaps driven by a tariff-driven trade war?
But, of course, those risks are present throughout the market. And in the sector, JPM looks like one of the two best plays with which to take that risk. I still think the regulatory concerns surrounding Wells Fargo & Co (NYSE:WFC) are enough to avoid that stock. Citigroup Inc (NYSE:C) looks like the highest-risk, highest-reward play, given its ongoing turnaround.
So, from here, it’s JPM stock or Bank of America Corp (NYSE:BAC). I’ve been a long-time bull on BAC, which has been the best performer of the big four banks over the past few years. It’s still my preferred play in the sector, though very slightly.
Truthfully, I don’t think investors can go wrong owning either JPM or BAC — the difference is mostly a matter of taste. Both stocks look cheap, both should have a big 2018 and both look capable of managing any unexpected headwinds. There are risks here, but that’s always the case with financials.
In both cases, the risks appear worth taking.
As of this writing, Vince Martin has no positions in any securities mentioned.