JPMorgan Chase (JPM) stock plunged earlier this year when the "London Whale" losses broke into the news, but at this point it has recovered somewhat. The stock is now up about 30% from its lows in early June and has gained 18% on the year, with a recent bounce on strong third-quarter numbers. JPMorgan's revenue climbed 6% to $26 billion, and the comparison was even better on a sequential basis. According to the company, poorer results at the investment bank vs. last year were offset by higher net revenues in commercial banking. Net income was substantially higher, as well, and earnings of $1.40 per share represented a 37% climb from $1.02 a year earlier.
Even post-recovery, JPMorgan stock trades at a discount to the book value of its equity. The current price-to-book ratio is 0.8x, signifying that investors are skeptical of the bank's internal valuations. The earnings multiples should also look attractive to a value investor: JPMorgan trades at trailing and forward price-to-earnings multiples of 9x and 8x, respectively. The company also pays a dividend yield of 2.8%. That's not enough for consideration purely on an income basis, but this is certainly a plus alongside a very attractive valuation profile.
In the second quarter, despite the London Whale incident, this stock has remained on our list of the 10 most popular stocks among hedge funds. At the end of June, the same number of funds and other notable investors had positions in the stock vs. the beginning of April. This contrasts with other widely owned stocks, including those of banks, which generally saw narrower interest. Paulson & Co., the investment vehicle of billionaire John Paulson, initiated a position of 4 million shares during the second quarter. That offset an investor who sold out of the stock. Meanwhile, Diamond Hill Capital, managed by Ric Dillon, doubled its stake in JPMorgan to a total of 5.5 million shares.
For some context, let's compare JPMorgan with fellow banks Bank of America Corp (BAC), Citigroup (C), Wells Fargo (WFC), and Barclays (BCS). BofA and Citigroup are each coming off of bad quarters that have left both of their trailing price-to-earnings ratios at above 20x. Revenue declined 25% at BofA and 35% at Citi, nearly wiping out both banks' net income. We aren't concerned about continued declines in these banks' business, and with P/B ratios in the 0.5x to 0.6x range, there's a value case here as well. But JPMorgan Chase does offer considerably more safety at only a moderate premium. All that said, sell-side analysts do expect BofA and Citi's issues to be temporary -- the stocks trade at 10x and 8x their respective 2013 earnings estimates.
As for Barclays, the bank did poorly in the second quarter, with net income having sunk 95% year over year. This bank suffered from own scandal -- investigations into LIBOR manipulation -- and this may be souring investor sentiment here as well. The stock trades at half the book value of the bank's equity, and at only 6x forward earnings estimates. As a result, we'd consider it a very cheap major bank, though -- in addition to its other issues -- it appears to have high exposure to Europe. We'd have to look at it more closely, though it does have some appealing characteristics.
Wells Fargo, for its part, is the only one of these five banks trading at a premium to book value, with a P/B ratio of 1.3x. On an earnings basis, this bank is more in the same range as these peers -- a forward P/E of 9x, for example -- though this makes the stock at little more expensive than JPMorgan by that metric, as well. Its revenue and earnings grew at double-digit rates in the third quarter.
At this point, bank stocks do generally look very good on valuation. However, those that have the best P/B ratios -- Citigroup, Bank of America and Barclays -- all have issues, and we can understand why an investor might want to avoid them. JPMorgan Chase offers good value and, in our view, considerably more security. Wells Fargo doesn't look overpriced in absolute terms -- we wouldn't be short it -- yet we also doubt that its greater perceived safety warrants such a large premium to JPMorgan Chase on a book basis.