The banks are not getting much love and JPMorgan Chase (NYSE:JPM) is no exception. Bulls don’t get it, as the fundamentals, valuation and dividend yield are all attractive. Yet JPM stock just can’t seem to fetch a bid or sustain a rally. So why would anyone want to own JPM?
The market is going through a period of intense chop right now. As investment dollars rotate between sectors, it’s creating a frustrating “churn” that’s leaving tons of failed breakouts in its wake. For the financials, the worry over an inverted yield curve is dealing extra damage.
An inverted yield curve occurs when short-term rates are higher than long-term rates. In the past, this event has been an extremely accurate precursor to a recession, although it does not guarantee one will come in the next 12 months.
Unlike the past though, we have low global rates, which creates big demand for a quality bond like the 10-year Treasury. At the same time though, we had the Federal Reserve raising rates on the short end of the curve.
Whether investors want to pin this inverting curve on this unique situation or the fundamentals of the bond market doesn’t really matter. Ultimately, an inverted yield curve hurts banks’ profitability and that’s why the sector was thrashed last week.
Valuing JPM Stock
An inverted yield curve hurts banks because they can no longer lend at the short-term rate and borrow at the long-term rate and collect the difference (known as the spread). But at what point does that not matter?
In the case of JPM stock, we’re talking about a very high quality bank. However, even if it’s Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) or Wells Fargo (NYSE:WFC), all of these names are well financed and are trading with low valuations.
JPM stock currently trades at 10.5 times this year’s earnings. While revenue is forecast to grow just 2.4% this year and 3.2% next year, earnings growth is much more impressive. Analysts are calling for 8.2% growth in 2019 and 8.1% in 2020. For just ~10 times earnings, that’s really not a bad price to pay for consistent growth.
Taking it a step further though, JPM stock also pays out a 3.2% dividend yield. Unlike other companies, the banks are held to a pretty high liquidity standard by the Federal Reserve. As a result, each year the banks go through a round of stress tests to make sure they can handle a severe liquidity event.
Based on their results, the companies are allowed to set their capital return plans for the coming year. These results will be released in June and could act as a potential catalyst for JPM stock.
Last year, JPMorgan stock announced a 43% increase in its quarterly dividend and a buyback of up to $20.7 billion for the next year. Hopefully this year we’ll get another notable increase.
Trading JPMorgan Stock
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Last week’s yield inversion scare drilled JPM stock just after it was threatening to breakout higher. The $107 area sports the 200-day moving average and the 61.8% Fibonacci retracement for the 52-week range. With Monday’s 3% pop higher, shares are over the notable $104 area.
To see a sustained move higher though, investors need JPMorgan stock to clear $107. Above last week’s high would help too, while $112 would be a great upside target to use.
Given the lack of bullish momentum, it’s hard to imagine the stock pushing through this level on its first try. On the downside, bulls should be happy to see $100 hold as support. Below that and $98 could be on the table. If that mark fails, downtrend support (blue line) should buoy JPMorgan stock.
While JPMorgan is a solid company, its stock has not been good. It needs to show more strength to lure in the bulls.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
