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Last week saw a relatively rare event on Wall Street when R.W. Baird analysts led by David George said JPMorgan (JPM) was "best-in-class," but that it is "time to take profits" in the shares. That is, Baird put a "sell" rating on Jamie Dimon. JPM is up almost 50% so far this year and common shares are changing hands at roughly 14 times forward 2026 earnings. Below we take a hard look at the House of Morgan and some of the other names in the WGA Bank Top 10 Index.
Source: WGA LLC
The surge in JPM following the election win by President Donald Trump was unusual and arguably begs to be sold, but the same can be said of a number of top banks, as shown in the chart below. The entire bank group moved higher with the election, but this change in valuation may not be permanent.
Source: Google Finance (11/08/24)
Will the change in government in Washington be sufficiently profound to impact bank stocks so dramatically? Probably not. The end of the Biden Administration will certainly usher in a more positive environment for all types of companies. After four years of progressive madness in Washington, banks are likely to see more reasonable behavior from federal regulators.
Banks will also see higher credit expenses and flat to down net-interest margins because of bond market volatility. With the 10-year Treasury note at 4.3% yield Friday, the mark-to-market losses for US banks will again rise. As of Friday’s close, JPM was trading over 2x book and 5x revenue, so it may seem a safe bet that the stock is overvalued.
Readers of The IRA should recognize that a lot of equity managers have piled into JPM and other large-cap names as part of the return of allocations to big banks since the end of Q2. Of note, JPM did not really trade off in the first half of the year. As a result, it will take a considerable stumble by JPM to convince managers to move out of the $670 billion market cap stock. When they do change their view of JPM, however, look out below for all financials.
JPM is now ranked #3 in the WGA Bank Top 10 Index and has been in this exclusive group all year. The stock has a beta just above 1, which is a function of the steady, almost 50% appreciation of JPM during 2024. Short-interest on JPM is < 1% of the float and still tiny compared with other large cap names. Yet there is a growing crowd of short sellers following the leading bank stock.
Short-interest on JPM increased through the summer, culminating in a sharp selloff in August on recession fears. The median level of short interest for the S&P 500 is just 1.8% vs over 3.5% in 2008. The secular inflation of equity valuations over the paste decade has naturally tended to push down broad measures of short-selling. But that said, JPM is definitely attracting more attention from shorts who see a huge stock that may be due for a correction.
So is JPM expensive? Compared with other stocks in our group, no. The bank has below-peer credit losses and the best operating metrics of the largest banks. Fact is, the banking industry has segmented into a handful of above-average performers and JPM is the largest leader of these winners. These stocks are visible in the WGA Bank Top 10 Index as shown below. Subscribers to the Premium Service have access to the constituents of the index and the weightings.
WGA Bank Top 10 Index
Source: WGA LLC
American Express (AXP) is trading near 7x book value vs 4x a year ago. Another top performer, Ameriprise (AMP), is over 8x book vs 7x a year ago. East West Bancorp (EWBC) is just below 2x book value vs 1.1x a year ago. With a bit of an interruption in the first half, most of the better performers in the group are fully valued or more because a number of the other large-cap names are underperforming significantly.
For example, there is a reason that Warren Buffett has been selling Bank of America (BAC) for the portfolio of Berkshire Hathaway Inc. (BRK). BAC ranks 46th in the WGA Bank Top 50 Index, an improvement from Q3 2024. Yet BAC is still dragging because of the bank's abysmal job of balance sheet management during and after the Fed's experiment in "quantitative easing" between 2020 and 2022. BAC's yield on earning assets vs net income was just 1.92% in Q3 2024.
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