As we leave behind another earnings season, you may now be wondering whether JPMorgan Chase (NYSE:JPM) may make new highs in the coming weeks. Currently, the JPM stock price is mostly flat for the year, hovering around $138.
Banks play a vital role in our economy and JPM is one of the biggest. In mid-January, it delivered excellent top- and bottom-line quarterly numbers that pleased analysts.
Many investors are rather nervous about the potential economic effects of the coronavirus outbreak on the global economy. And the presidential election primaries are adding to domestic uncertainties.
Indeed, many stocks may be vulnerable to a pullback in the coming weeks. However, in the long run, I expect the bank to continue to beat expectations and the stock price to make new highs. Let’s take a closer look.
JPM Stock Has Strong Fundamentals
On Jan 14, JPMorgan Chase, the biggest U.S. bank based on deposits and revenue, delivered robust Q4 2019 earnings results. It was indeed the group’s strongest annual profitability since before the financial crisis over a decade ago.
Management reported a net income of $36.4 billion for 2019, up 12% YoY. Earnings per share came at $2.57, up 21% YoY. It was much higher than the $2.35 per share expected by the Street.
The largest U.S. issuer of credit cards is also a leader in investment banking. The group’s diversified business operates in four segments:
- Consumer & Community Banking (largest segment by net income);
- Corporate & Investment Bank;
- Commercial Banking; and
- Asset & Wealth Management (most profitable segment due to strength in trading where revenue rose 56% YoY).
During the earnings call, chief financial officer Jennifer Piepszak said “2019 was a year of record financial performance across revenue, net income and EPS. Our outlook heading into 2020 is constructive, underpinned by the strength of the US consumer.”
Management also emphasized that the branch expansion strategy which started in 2018 was going well. JPMorgan currently has over 5,100 branches across the country.
Two years ago, it announced plans to open 400 additional branches in several years. The group emphasizes that extra branches contribute to growth in the commercial and industrial loan portfolio, which has higher yields than most other loan categories. Many analysts regard branch expansion as an effective long-term growth strategy.
Banks need to show investors how well their money is being utilized, and one important measure is return on equity (ROE). Profits are the “return” part of the equation. They in part depend on interest rates. Equity part is in part determined by regulators. In recent quarters, its ROE has been around 15% or better, which is regarded as a good number by the industry.
Catalysts Support JPM Stock
In addition to the momentum across its business segments, the company has other catalysts that are likely to aid the JPM share price. For example, its trailing price-to-earnings ratio of 12.5X is likely to catch the attention of value investors.
Long-term investors also enjoy a current dividend yield of 2.6%. Dividends and stock repurchases concern shareholders because they have an effect on investment returns. In Q4, the group distributed a total of $9.5 billion distributed to shareholders in the form of dividends and share repurchases of $6.7 billion.
In other words, the bank rewards long-term investors with generous cash distributions in terms of dividends and buybacks. JPM is a strong case of management that is able to look after its shareholders through capital distributions over the long term.
Management has in recent months said that the bank saw no major recession risk in the U.S. It has also announced that its Commercial Banking arm would be continuing to expand internationally in European and Asia-Pacific markets. The bank is eyeing high-growth opportunities in these markets.
During the conference call CEO Jamie Dimon said that in the months ahead, the bank could likely make acquisitions, especially, in electronic payments and healthcare.
Such strategic moves are likely to bring further strength to JPM’s stock price in the years ahead. Management also aims to increase its artificial intelligence (AI) driven execution capabilities in sales and trading. These developments may also help decrease operating costs and improve margins.
So Should You Buy JPM Stock Now?
I regard the company as a best-of-breed bank, and its stock price is backed by fundamentally strong business segments. It also has important competitive advantages, such as new client growth potential, cost-cutting opportunities and capital return capacity, that support the business.
High market share in its respective operational segments, as well as proactive management, add to the strength of JPM stock, which is up 35% over the past 12 months.
Variables such as interest rates, economic growth, global political and trade worries and activity in the housing markets can, nonetheless, impact a bank’s stock price. Therefore there will likely be daily price swings in JPM shares as news headlines change.
If you are an investor that also follows technical charts, you may be interested to know that many of the short-term indicators urge investors to be cautious. In short, they are mostly overbought. In the weeks ahead, I’d expect profit-taking in the share price. A fall toward $130 or even $125 would be likely.
However, within a quality/reward matrix, the bank scores well. And long-term investors may see any further price declines as opportunities to buy into JPM stock.
As of this writing, the author did not hold a position in any of the aforementioned securities.