David Katz is a regular contributor to Real Money Pro. Click here to learn about this dynamic market information service for active traders.
JPMorgan Chase (JPM) kicked off the financial earnings season on Wednesday with numbers that were much better than expected. Operating earnings came in at $1.40 per share versus $1.26 for the consensus estimates. There are a number of interpretations on what the real operating earnings number were, but all agree it was a beat. Revenues were also better than expected. The stock rallied nicely off the results, followed by the positive tone of the post-earnings conference call.
The better-than-expected numbers were led by solid growth in net interest income, declining expense levels, contained credit costs and greater-than-expected trading results. Loans reported healthy growth across all the sectors, including consumer, autos, commercial and real estate. The one bugaboo that worried investors going into the quarter was the potential for rising energy-related credit losses, but these were in line with general expectations.
One area that particularly surprised investors was a growing level of net interest income due to the Fed rate hike of 25 basis points back in December. The company also surprised with better-than-expected trading results, and highlighted that trading was stable in March and going into April.
We believe the gains in the stock after the earnings print are the tip of the iceberg and feel the combination of depressed stock price levels and improving (and strong) JP Morgan fundamentals should lead to healthy investment returns in the shares in the coming year as the economy continues to muddle forward, trading rebounds and further Fed rate hikes take hold.
Besides JPMorgan shares, investors should take a look at a broad swath of the financial sector for further opportunities. Shares across the entire financial sector are trading at extremely low levels of valuation, from seven to 12x earnings. (Earlier this week we highlighted Goldman Sachs (GS).)
The group's fundamentals eventually should rebound as the overall economy improves. Almost all the management teams are taking further steps to help their beleaguered investor bases with additional cost-cutting programs, stepped-up buyback plans and enhanced dividend actions.
We believe it is just a matter of time before the financial sector generates strong returns for investors. Here is a list of financial stocks that we find highly attractive for investors with a six- to 12-month time horizon.
Name Ticker P/E Yield
AIG (AIG) 11.42 2.35%
Ameriprise (AMP) 9.9 2.78%
Bank of New York (BK) 12.2 1.84%
Citigroup (C) 8.9 0.46%
Capital One (COF) 9.0 2.31%
Fifth Third (FITB) 11.1 3.05%
Goldman Sachs (GS) 10.6 1.64%
JP Morgan (JPM) 10.8 2.87%
MetLife (MET) 7.7 3.39%
Morgan Stanley (MS) 10.9 2.35%
PNC (PNC) 11.5 2.42%
Prudential (PRU) 7.7 3.72%