J.P. Morgan Stock: Great Shape Going into 2022

J.P Morgan Chase (NYSE: JPM) is America’s largest investment banking stock by market cap.

Led by Jamie Dimon, the firm has achieved tremendous success in recent times through offerings in investment banking, trading, loan origination, related consumer products, and more. I am bullish on the stock.

Stress Test Index Cohesion

Contrary to many opinions in the press, the financial markets are actually in a low-stress environment. The Stress Test Index currently trades below zero at -0.69, meaning that economic conditions are a lot less volatile than they were in the earlier stages of the pandemic when the index traded above the 5.00 mark.

Banking stocks tend to perform at their best during low-stress environments because of their interlinkages with the centralized economy. As inflation cools down in 2022, J.P. Morgan will experience less erosion of debt products and more predictable returns in the equity markets, adding balance to the firm-specific stress test.

Adding to the above, J.P. Morgan looked solid in its very own stress test back in June last year when the bank remained on course for a tier 1 equity ratio of 11.2% by 2023, well exceeding the threshold of 4.5%. J.P. Morgan’s likely to experience high stock returns if it can continue to provide such strong firm-specific characteristics in a favorable market environment.

Breaking Down the Business Units

The big bank ranked second in M&A deal flow for 2021 with a 21.4% market share. A record $5 trillion in M&A deals were done in 2021, which J.P. Morgan benefitted from as one of the market leaders.

If we analyze the bank’s latest earnings report, it’s evident that it ended the year well. J.P Morgan had experienced exceptional growth in trading with its Q3 earnings report signaling 9% quarter-over-quarter growth of segment revenue. In fact, this happened during a period where the markets slowed down; it’s thus a sign of the high level of skill held by the bank’s traders.

Other key segments also ended the year well, with credit card purchases increasing 4% quarter-over-quarter, and period-end card balances improving by 1% during the same period of time.

Past results never guarantee future performance, but we can draw up a trajectory by using historical data, and the data at hand suggests that J.P. Morgan is on the up for 2022, with few obstacles in its way.

An Undervalued Stock

J.P Morgan stock is undervalued relative to its five-year average. Many believe that mean reversion isn’t a valid reason for investment decisions, but this is a false narrative because cyclical stocks such as banks have shown time and time again that their ratios are mean-reverting.

According to J.P Morgan’s GAAP P/E, its stock is undervalued by 23% with its PEG of 0.1, also indicating that the P/E ratio is lagging earnings per share growth.

Furthermore, J.P. Morgan stock is trading at a dividend yield discount of 7%, and many may not know this, but you can actually judge a stock’s value based on its dividend yield if the payout ratio remains constant.

J.P Morgan will usually trade above sector averages with a Log of Unadjusted stock price and Return on Equity premiums worth 64.96%, and 52.64%, respectively; investors thus shouldn’t value the stock relative to its sector peers but rather its own historical averages.

Wall Street’s Take

Turning to Wall Street, JPM has a Moderate Buy consensus rating, based on 10 Buys, three Holds, and two Sells assigned in the past three months.

The average J.P. Morgan price target of $181.15 implies 8.3% upside potential.

Concluding Thoughts

The climate of the financial markets is well set for banking stocks to outperform other sectors.

J.P Morgan stock could provide investors with better returns than its sector peers due to its market positioning, and historic trading premiums.

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Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.