Is This Behemoth Bank’s Stock a BUY or STAY AWAY?

JPMorgan Chase & Co. (NYSE:JPM) — the largest bank by assets in the US — along with its big four brethren has seen better days.  Already facing increased banking regulation and public confidence hitting all-time lows (21% according to June 2912 Gallup survey), the shocking news of a major trading scandal and the potential involvement in the Libor scandal have shattered its image of the bank getting it right.

On July 13 2012, JPM reported mixed earnings, despite the trading loss.  However, the original estimate of the loss at $2 billion grew to a reported figure of $5.8 billion and the company had to restate 2012 Q1 earnings.  The immediate response to the moderately disappointing results was a drop in the share price, but one week later, the shares recovered and are now trading above pre-announcement levels.

Throughout this financial crisis, JP Morgan has enjoyed the reputation of the bank that seemed to know what it was doing.  CEO Jamie Dimon admitted they didn’t know what they were doing with the trading unit in question and some investors are holding their breath in light of the investigation of the Libor scandal.  Will there be another shoe to drop on JPM’s already tarnished reputation?

With that image in question in the minds of some, is JPM a BUY, a WAIT and SEE, or a STAY AWAY? (Note: my conclusion is at the end of this post.)

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

It is hard to separate the truth about new regulations on the financial industry from the breathless hype from industry insiders claiming they will end up selling apples on street corners once the regulators get through with them.  A Republican sweep of the upcoming elections would open the door to the possibility of the most supposedly onerous regulations being rolled back, which could act as a big catalyst for JPM and the whole sector.

H = High Quality Pipeline

All the banks are scrambling to come up with ways to make up for anticipated losses on their credit card operations.  JPM gets about 19% of their revenue from this business segment with another 18% coming from retail banking.  One of the bank’s latest new products is a prepaid debit card called the Liquid Card.  The product is geared towards customers who are unable or unwilling to avoid the $12 monthly fee for a Chase Checking Account.  The fee for the Liquid Card will be $4.95 a month with no additional charges for adding money to the card or for individual transactions.

E = Equity to Debt Ratio is Close to Zero

At an astounding debt to equity ratio of 3.58, or 358%, JPM lags far behind its major competitors.  Bank of America stands at 2.66 or 266%; Citigroup (NYSE:C) has a Debt to Equity ratio of 2.91, 0r 291%; Wells Fargo (NYSE:WFC) stands at 1.22 or 122%; and US Bancorp (NYSE:USB) has a Debt to Equity ratio of 1.57 or 157%.

A = A-Level Management Runs the Company

Jamie Dimon generated the kind of respect depicted in those old EF Hutton commercials where everyone stops to listen when Hutton spoke.  Jamie Dimon was the most respected banker in the country and his cries that the banks were perfectly capable of regulating themselves have been shown to be devastatingly hollow in light of the trading scandal.  His reputation may suffer further damage pending the results of investigations into JPM’s role in the Libor scandal, if any.

T = Technicals on the Stock Chart are Strong

Since the Quarterly Earnings Release in July of 2012, JPM’s technicals are looking very strong.  As of September 10th 2012, the stock price is 5.46% above its 20 Day Simple Moving Average, 8.8% above the 50 Day SMA, and 6.63% above the 200 Day SMA.

S = Support is Provided by Institutional Investors & Company Insiders

JPM 72.88% institutionally owned.  The top five holders are Vanguard, Wellington Management, BlackRock, T.Rowe Price, and Fidelity Investments. Insider transactions and changes in institutional holdings reported indicate no unusual activity that could be related to JPM’s problems with the trading scandal and the Libor investigation.

H = Honest Accounting Governs the Company Books

Once upon a time, some experts warned retail investors to beware of companies using any firms other than one of the major accounting houses.  Arthur Anderson’s alleged complicity in the Enron disaster turned that advice on its head.  JPM uses Price Waterhouse Cooper and yet average investors have to look at the recent trading scandal and wonder how these well-regarded auditors could have missed this. 

E = Earnings Are Increasing Quarter over Quarter

Following the Q2 2011 reported earnings per share of $1.28, EPS declined for the next two quarters before rebounding in Q1 of 2012 to $1.31 and then falling again in Q2 2012 to $1.23.

E = Excellent Relative Performance to Peers

Return on Equity is a favored measure of many investors and on this metric, JPM does not live up to its golden reputation as America’s best bank.  Their ROE is 9.24%.  That is better than Bank of America’s (NYSE:BAC) 4.67% or Citigroup’s 2.37%, but falls short of Wells Fargo’s ROE of 12.37% and Us Bancorp’s 16.48%.

Conclusion

Simply put, there are just too many potential shoes to drop here.  While some intrepid investors might be willing to WAIT and SEE, the prudent course here is to STAY AWAY.  No one can say for certain the impact of the yet-to-be implemented banking regulations.  The newly formed Consumer Finance Protection Bureau (CFB) and consumer outrage may hinder the banking industry’s efforts to find new ways to generate revenue.  A recent Bloomberg report stated that Attorneys General in New York State and Connecticut have subpoenaed seven banks as part of their Libor investigation, including JPMorgan Chase and Citigroup.

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