JPMorgan (JPM) just this week held its first investor day in three years. Despite the 20% decline in the stock this year, CEO Jamie Dimon and his management team were upbeat as they gave calm reassurance that the bank was doing well. Let's dig into the presentation and I'll give my take on how to invest in the financial services giant.
At the investor day, the team's message was clear: JPMorgan is prepared for any economic outcome, global offerings have given the bank a competitive advantage, and JPM is investing in high-return opportunities. As a bastion of stability in an uncertain macro environment, I believe JPM is an ideal candidate to buy -- and to write calls after the stock pullback.
Looking back, we see that the market had overshot with optimism in last year's rally. JPM had spiked too high after the bank's earnings had far outpaced expectations thanks to the release of pandemic-related loan-loss reserves -- which had pumped up the bottom line. Since, the normalization of earnings has proved a disappointment for Wall Street, knocking the stock to about 10-times 2023 expected earnings. Now, there's significant negativity baked into the shares.
At the investor day, net investing income was raised by $3 billion to $56 billion, reflecting the enormous benefit banks reap from a higher interest rate environment. Jamie Dimon also emphasized the firm's growing market share in all categories. Significant investments in technology, up 13% to $14 billion this year, have helped the bank out-duel competition. JPM also expects high single-digit loan growth in 2022.
JPMorgan management prepared Wall Street for slightly higher expenses next year because of compensation inflation. JPM expects to continue to optimize the balance sheet and focus on cash acquisitions, reflected in a relatively small stock buyback program this year. Since 2012, JPM has lowered its shares outstanding from around 3.9 billion to around 2.9 billion through aggressive buybacks that will likely return in future years.
Importantly, management notes that the credit outlook in the U.S. remains strong. Also, by the end of 2022, it expects net investment income to be annualizing at $66 billion. Both reassuring outlooks compelled the Street to raise net investment income estimates and lower credit costs.
"JPM is still the 800-pound gorilla in terms of diversification, balance sheet strength, organic growth momentum, consistency, and profitability, which deserves a premium valuation" says Oppenheimer, as it summed up its takeaway from the investor day.
A conservative investment strategy is buying JPM stock and writing at-the-money calls against the position. Buying the stock around $130 and writing the November $130 calls, for instance, would return over 9% (plus 18% annualized) including two dividend payments, if the stock closes over $130 upon expiration. Certainly, a lot can change in six months, but a buy/write strategy for the top global bank after a reassuring outlook is a prudent way to capitalize on the reasonable valuation and elevated assumed volatility.