Since the 2008 financial crisis, few bank stocks have performed more consistently than JPMorgan Chase (JPM) . Over the years, it's one of the first stocks I've looked to buy on weakness. The shares commonly sell off on earnings days as a sell-the-news event, but rarely as they did last Friday on investor disappointment with quarterly results.
The outlook for much higher expenses took the Street by surprise, prompting longtime bank bull Mike Mayo to downgrade the shares and lower his price target from $210 to $180. "This issue is certain to us: front-loaded spending for less-certain back-end benefits," the analyst opined.
Is it prudent to buy the dip in JPMorgan after the earnings selloff? JPM may seem like a prime buying opportunity, and generally it is on severe weakness. The shares are back to flat on the year while the banking index is up 4%, with the outlook for higher interest rates more secure.
However, investor disappointment over rising cost pressure, especially from wage increases, needs to be respected. Consequently, waiting for lower levels to buy below $150 seems appropriate after such a negative surprise. The CFO spelled it out to analysts: "We are in for a couple of years of sub-target returns." These are words unexpected to be heard from JPMorgan management.
This year is setting up as a lower profit reset for banks after pandemic losses never materialized, while significant reserve releases were accrued over the past few quarters. For JPMorgan, profits fell 14% for the quarter from the prior year. This was mostly expected; the caution of much higher future expenses was not. Expenses in 2022 will increase by 8% to around $77 billion, primarily because of higher compensations and investments in technology.
This year the Street had already expected JPMorgan's earnings per share to decline by 23%, from $15.36 to $11.83. Higher expenses will reset earnings expectations even lower for 2022. Bank of America's analyst lowered expected 2022 EPS to $10.66. Buying JPM shares at $150, the equivalent of around a 14x price-to-earnings (P/E) multiple, is below the 20-year average of 15x. JPM is reasonably priced for the top banking franchise with a 2.6% yield and a $25-billion-plus buyback. It has reduced its shares outstanding by 24% in the last decade.
The stock market action is likely to continue along the choppy trading pattern that has marked the start of the year. In general, patiently waiting to buy quality stocks on real weakness makes sense. JPMorgan has the premier banking operation worldwide and ramping up expenses to invest in talent and technology will help secure its competitive position. Investor uncertainty over higher costs will offer a buying opportunity, especially with the tailwind of rising interest rates. The anticipated rise in short-term rates will improve lending profitability and net interest margins.
JPM shares should be reliable to buy on weakness, although management's caution over the near-term will give investors pause. Wage pressure is real and ramped-up technology spending will take years to generate a return. But the bar for expectations has now been set lower. The best-of-breed banking concern, investing heavily to position itself for market share gains and long-term success, will undoubtedly pay dividends down the road. Still, given the reduced earnings outlook, waiting for a better entry price below $150 is prudent.
