Is JPMorgan Chase a Safe Investment?

With shares of JPMorgan Chase & Co. (NYSE:JPM) trading around $58, is JPM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

JPMorgan Chase is a financial holding company that provides various financial services worldwide. The company is engaged in investment banking, financial services for consumers and small businesses, commercial banking, financial transaction processing, asset management, and private equity. Financial services companies like JPMorgan Chase are essential for well-functioning economies around the world.

In the past year, regulators turned their attention to the large financial institutions that dominate the business of physical commodities trading. With new rules penned by Congress limiting the degree to which banks can trade for their own accounts and an ongoing investigation from the Commodity Futures Trading Commission, JPMorgan Chase has decided it is time to get out of the physical commodities trading business. After pursuing a buyer for months, the company finally announced Wednesday morning that Mercuria Energy Group, a fast-growing Swiss trading firm, had agreed to purchase the unit for $3.5 billion in cash. Mercuria, founded by former Goldman Sachs (NYSE:GS) traders, has grown into one of the world’s four largest independent commodities traders, with offices in 28 countries and more than 1,000 employees. Subject to regulatory approval, the all-cash transaction is expected to close in the third-quarter of this year.

“Our goal from the outset was to find a buyer that was interested in preserving the value of JPMorgan’s physical business,” Blythe Masters, head of JPMorgan’s global commodities business, said in the Wednesday press release announcing the sale. “Mercuria is a global leader in the commodities markets and an excellent long-term home for these businesses.” What the statement did not explain is whether Masters, a long time veteran of the bank, would leave JPMorgan to remain with her team.

T = Technicals on the Stock Chart Are Strong

JPMorgan Chase stock has done relatively well in the past couple of years. The stock is currently moving higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, JPMorgan Chase is trading above its rising key averages which signal neutral to bullish price action in the near-term.

JPM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of JPMorgan Chase options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

JPMorgan Chase options

22.18%

53%

51%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

April Options

Flat

Average

May Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on JPMorgan Chase’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for JPMorgan Chase look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-6.47%

-112.14%

32.23%

33.61%

Revenue Growth (Y-O-Y)

-7.02%

-7.67%

13.67%

-3.57%

Earnings Reaction

0.06%

-0.01%

-0.30%

-0.60%

JPMorgan Chase has seen mixed earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about JPMorgan Chase’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has JPMorgan Chase stock done relative to its peers, Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and sector?

JPMorgan Chase

Bank of America

Citigroup

Wells Fargo

Sector

Year-to-Date Return

-0.56%

10.69%

-6.39%

5.87%

3.40%

JPMorgan Chase has been an average performer, year-to-date.

Conclusion

JPMorgan Chase is a bellwether in the banking space that forms an essential part of the United States financial system. The company finally announced Wednesday morning that Mercuria Energy Group had agreed to purchase the unit for $3.5 billion in cash. The stock has done relatively well in the past couple of years and is currently surging higher. Over the last four quarters, earnings have been mixed while revenues have been decreasing which has produced mixed feelings among investors. Relative to its peers and sector, JPMorgan Chase has been an average year-to-date performer. WAIT AND SEE what JPMorgan Chase does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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