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The latest 13F filings are out, which means some of Wall Street's finest investors' quarterly U.S. common stock trades have been revealed to the public. Ray Dalio (Trades, Portfolio)'s Bridgewater Associates often grabs the headlines due to its impressive returns.
One of Bridgewater's trades in particular caught my attention. The firm added JPMorgan Chase & Co (JPM, Financial) to its portfolio, giving the stock a 0.51% portfolio weight. While Dalio's Bridgewater did not confirm its rationale for investing in JPMorgan, this is a stock that I have been personally keeping an eye on. Here's why I like JPMorgan.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Assessing JPMorgan's fundamentals
JPMorgan recently blitzed past its fourth-quarter earnings estimates, beating its revenue target by $320.96 million and dominating its earnings expectations by 47 cents per share.
Although the bank's retrospective results are appealing, its prospects must be considered before drawing a final consensus. The U.S. banking giant's 18% year-over-year surge in top line revenue and its 6% increase in net income were primarily due to progress in its interest-earning operations, which benefitted from elevated interest rates. Although global bond yield curve inversions pose significant risks to JPMorgan's long-dated debt assets, its general fixed-income portfolio will probably continue to benefit from higher global interest rates.
Source: JPMorgan
Furthermore, JPMorgan could see its non-interest-bearing activities proliferate throughout 2023. According to JPMorgan's latest financial statements, its non-interest income advanced by 6% annually on an operating basis. However, investment banking fees and asset management commissions slid by 18% and 10%, respectively.
I believe JPMorgan's investment banking and asset management activities are likely to improve this year amid a recovering stock market, which lends appeal to equity-based transactions.
Furthermore, JPMorgan's balance sheet is primed for growth. The bank's held-for-trading assets slumped during its past quarter as its debt trading instruments shed 7% of their quarterly value, caused by unfavorable liquid bond markets. However, a sharp year-to-date recovery in both treasury and corporate bonds implies that JPMorgan could experience a markup of its held-for-trading bonds, adding value to the company's balance sheet.
Source: Bloomberg
Lastly, JPMorgan's tier-one equity capital ratio remains among the best in its industry. The firm's sublime tier-one equity ratio of 13.2% suggests that its risk-weighted asset allocation is intact, which might lure investors toward its stock.
Source: JPMorgan
Valuation
At face value, JPMorgan's stock seems fairly valued as its price-book ratio of 1.59 suggests the market has already priced its asset base. Considering a banking stock's price-book ratio for investment purposes is critical as its balance sheet is consolidated with quoted and liquid assets, presenting an accurate representation of fair value.
Despite JPMorgan's elevated price-book ratio, as mentioned before, recovering stock and bond markets might mark up most of JPMorgan's asset base. Therefore, I believe this justifies a slightly higher price-book ratio.
Furthermore, JPMorgan's forward dividend yield of 2.78% presents investors with lucrative carry returns, accordingly improving the security's risk-adjusted return profile.
Noteworthy risks
JPMorgan is inextricably linked to the global economy. Multinational banking stocks yield excess sensitivity to the economy as they hold sensitivity to consumer sentiment. Moreover, a multinational bank's global exposure means it is more likely to be affected by exogenous events than non-financial companies. Therefore, investors must understand the cyclical risks embedded in JPMorgan's stock.
Why is Bridgewater's buy significant?
An analysis of other people's trades should always be considered from a portfolio vantage point. In isolation, a stock hosts the same principles for all investors. However, in a broader context, the same stock presents differentiated dynamics to investors depending on the asset's role in their investment portfolios.
The big hedge funds are also often able to negotiate favorable deals that would not be available to the general public, which is just one more reason why no one should ever blindly follow a guru into a stock.
An overview of Bridgewater's portfolio suggests that it is currently overweight on defensive sectors such as consumer staples and health care. As such, the addition of more cyclical exposure via JPMorgan is notable.
Final word
Overall, I believe JPMorgan's stock is in terrific shape. Elevated interest rates and recovering liquid markets will likely add to the firm's trading revenue and mark up its asset base. Moreover, investment banking fees might recover amid an improved equity market environment. Due to supportive interest rates and a recovering equity market, banking stocks such as JPMorgan possess significant appeal in my opinion.
Although JPMorgan's price-book ratio is slightly elevated, the company will probably benefit from a growing asset base, presenting investors with a potential value gap. Into the bargain, JPMorgan has a decent dividend yield.
