JP Morgan:
The jaw-droppingly low Fed lending rates, uncomfortable inflation numbers, and the uncertain economic future post-pandemic have been the talk of the town for the last several months now. While we understand how these phenomena may affect the larger market negatively, they also open up new doors of opportunities for a few. We, therefore, seek your attention towards a certain sector of the economy – the opportunity to invest in finance stocks! Is it super exciting? No. Is it a smart investment and hedge to inflation? 100% yes. Therefore we are truly excited about the prospects of the world's largest investment bank in the world – JP Morgan Chase (JPM). The reasons might not be as apparent as you think. Read further to find out why:
Positioning To Exploit The Inflationary Situation:
The US economy recorded inflation of 5% in May 2021, the highest since the ill-fated 2008 crisis. Going by the very low Fed interest rates (0-0.25%), which have been held steady by the Federal Reserve, the high inflation will seemingly prevail at least for some time. This is in large part due to the supply and demand imbalances. This NY-based investment bank is armed and ready to pounce on the situation and make the most of it. This Monday, the long-time CEO of JPM reiterated that the company has been ‘stockpiling cash’ rather than using it to buy treasuries or other debt instruments.
Why?
The Fed is expected to increase the interest rates of its securities in the near future. This is required to keep inflation under check. The company is waiting for that to happen, and will then benefit from higher interest yield on its deposits. Past their deposits the company is also making positive acquisitions yielding positive synergies.
Look no further than the: Acquisition of Nutmeg (UK)
The company has stepped on the throttle in its bid to invade the UK and expand its operations there. The acquisition of the London-based online investment platform Nutmeg is a giant step towards realizing this dominance. With almost $5 billion in Assets under Management (AUM), the online banking company is one of the largest of its kind in the region, and is growing at a record pace. The two following pieces of data are extremely exciting for their growth prospects:
- AUM, one of the most important metrics in the case of financial entities, reflect the total market value of the investments managed by the intermediary on behalf of its customers. Nutmeg has seen ~70% growth in a year in its AUM. For a company of its size, that is an unbelievable growth metric!
- The company’s revenue grew by 66% YoY as per its Q1 2021 statements. In short, despite its already big stature and a 9% global market share, JP Morgan is raring to grow, especially outside North America. Let's hone in here on the importance of this. This is a stock that is not only focusing on growth but is also giving you solid yield and income at a reasonable price. All three of those qualities make this stock a triple threat!
Past their acquisitions however the standalone performance of JPM is quite impressive.
We admit that operationally, the company had a forgettable 2020 – something we quite expected since the financial and investment sector was in hibernation for a significant part of the COVID-plagued year. However, JPM still managed to hang on and deliver the following solid results:
- It managed to increase its net revenue marginally (by 3.6%). Its pre-provision profit (banks are required to provide for bad debts) before income tax also grew by a similar rate.
- It continued to be one of the most efficient among its peers. In fact, with an Overhead Ratio of 54%, it scored better points than the likes of Bank Of America, Goldman Sachs, etc. In other words, for every $1 earned, the bank spent 54% on overheads.
- It's return on tangible common equity (14%) was second only to Morgan Stanley (15%) among its peers. The ROTCE measures how effectively shareholder equity was used to generate returns. Being another leader in this category shows the resiliency of the company.
But now that the markets are expected to bounce back, we expect the company to consolidate its already impressive operational performance and churn out even greater returns!
In a nutshell, the future seems bright for the bank, and its management is moving aggressively to grab more market share, especially in the digital finance segment. As admitted by the CEO, JPM may even enter the online payments world to compete the likes of Paypal! We can’t wait to check out what is in store for the giant, and will love to reap the rewards from its success! We therefore are rating this stock as overweight with a $170 price target. JPM is also a good diversifier in our portfolio in order to avoid fluctuations in other parts of our tech heavy portfolio.
Target Price: $170
Current Price: $149
Rating: Overweight
Target Date: 10-12 Months
Dividend Yield: 2.30%