Banks aren’t sexy like tech stocks, they don’t solve the worlds problems like health care, they don’t build anything like industrials. They just make money… from money.

JP Morgan is the worlds largest financial institution which makes money through four segments

• Consumer and Community Banking
• Corporate and Investment Bank
• Commercial banking
• Asset and Wealth Management

INVESTMENT THESIS

The Investment Thesis for JPMorgan is founded on three pillars.

1. Diversification – It’s important to have a financial institution as part of a broad portfolio. The stock offers a 3.45% dividend yield.
2. Banks make money – Banks make money from money. They take depositors money, they take the governments money, they take corporations money then they lend it out, they reinvest it and then make more money. The cycle continues.
3. Federal Government Financial Stimulus – Governments around the world have collectively announced over $14 Trillion of financial stimulus to not only sustain their economies through the Covid-19 pandemic, but to grow their economies afterwards. That money all gets cycled through financial institutions..

In considering a stock, there are three important criteria.

Best in Class – JP Morgan is the largest Financial Institution in the world with a strong management team led by Jamie Dimon and a financial balance sheet which exceeds US federal reserve requirements.

Secular Growth Trend – Banks are traditional institutions but as populations increase and the generations mature there is an evolution in societal behaviour towards saving and investing, but also towards borrowing to support the growing focus on the culture of ‘lifestyle’. Capitalist cultures drive corporate growth which fuels merger, acquisition and IPO activity providing consultancy fees.

Strong Macroeconomic Environment – The Covid-19 pandemic has weakened the global macroeconomic environment however this has been offset by over 414 trillion in global financial stimulus by governments.

RISKS

There are risks to an investment/trade in financial institutions

• 42 Million unemployed during the Covid-19 pandemic
• Credit, Loan and mortgage defaults
• Slower than expected economic recovery
• Government agencies slowing economic stimulus (Free Money)
• Corporations reducing capital expenditures which require borrowing

TECHNICAL ANALYSIS

Money Flow Index (80 indicates ‘Overbought’ 20 indicates ‘Oversold’) Current 62: Money has recently started to flow into the stock with room to the upside for a continuation of the trend.

MACD Momentum: is in an uptrend and the has recently crossed the ‘ZERO’ line which is a BUY signal confirmation.

On Balance Volume (OBV) (indicates accumulation or selling of shares by large Financial Institutions): There has been very little accumulation of shares by large financial institutions during the broader market recovery and there is lots of room for accumulation before previous levels are reached.

The GAP: A price gap occurs when a stock price has a significant drop from the previous days price. Gaps almost always get filled and there is a big gap between $104 and $114.

Technical Support First Level: $100

Technical Support Second Level: $90

Price Target 1: $114

Price target 2: $120

Note1: JP Morgan currently pays a $3.60/share annual dividend or 3.45%.

Note 2: JP Morgan along with other US banks have suspended share buyback programs due to Covid-19.

Note 3: Over the past three years JPMorgan has returned roughly $87 Billion to shareholders through dividends and share buybacks. Share buyback programs increase earnings per share and correspondingly provides a floor of support or ‘demand’ for the stock price.

what does that mean at moneywiseHQ

It takes money to make money is an age old investing paradigm.

Image the governments of the world gave you access to trillions of dollars at 0% interest, what would you do with it? 

JPMorgan takes that money and loans it out at higher interest rates. They invest it in financial instruments. They lend it to corporations who generate revenue which then gets deposited back in the bank.

They take money… and they make more money… to the average investor it is that simple, but in reality, how that money is made is very complicated involving credit spreads, equity and debt underwriting, lending, trade finance… it’s a never ending list.

Financial Institutions are the foundation of the economic system.

A market pullback always happens in waves of ‘sector’ selling from the weakest first to the strongest last. During the Covid-19 pandemic oil was first, then industrials followed by financials and technology. The market also recovers in waves but in reverse. First was technology and health care. Recently has been the rotation into industrials and many financials such as Goldman Sachs and Visa were early movers. JPMorgan has been one of the laggards although it is arguably the best.

Stock price is a function of the supply/demand equation. A stock price will move up if there is low supply and demand increases.

The On Balance Volume reflects that everyone who would have sold, already has and as the price moves up this means that there are very few potential sellers to slow down the gains or take profits until the price reaches the first target of $114.

moneywiseHQ Strategy

1. Buy on a breakout above $104 with an initial Price Target of $114. Maintain a STOP LOSS at $103 and re-evaluate the trade for a subsequent breakout above $104. If the price drops back below $104 it is likely to fall to a first technical support level at $100 then possibly $90.