Shares of banking giant JPMorgan (NYSE: JPM)
have had their biggest drop in months in recent sessions as investors reel from a dirty miss in last week’s earnings. Having come close to matching their all-time high from last October as recently as the start of last week, shares now find themselves down a full 10% after two consecutive gap downs.
One of the main culprits behind the drop was a dodgy top-line revenue print for Q4, which at $29.26 billion was not only down 3% year on year, but also $520 million lower than what analysts had been expecting. That their bottom line EPS came in comfortably ahead of expectations mattered little, as this was the smallest quarterly earnings beat that JPMorgan has registered in the past two years. Higher than expected expenses from things like higher labor costs were one of the main reasons for the tightening in profitability, which would have been even worse had not $1.8 billion been added from the releasing of reserves for loan losses which didn’t materialize.
So in the face of what looks like slowing growth, investors are being forced to reevaluate their view on the stock’s fair value, a decision not made easier by the fact that JPMorgan also lowered their forward guidance. CFO Jeremy Barnum told reporters on the earnings conference call that “management expected headwinds of higher expenses and moderating Wall Street revenue to cause the company’s returns to dip from recent years.” This means that the banking giant will more than likely miss its well known 17% target for returns on capital. Barnum added that “over the next one to two years, we expect to earn modestly below that target as the headwinds likely exceed the tail winds”.
You’d be forgiven for thinking that banks should be expecting profits to widen as we head into a tightening interest rate cycle, and JPMorgan CEO Jamie Dimon made a point to press home the positive factors that remain. He told investors that “the economy continues to do quite well despite headwinds related to the Omicron variant, inflation and supply chain bottlenecks, while credit continues to be healthy with exceptionally low net charge-offs, and we remain optimistic on U.S. economic growth.”
But it’s clear that for now at least, investors aren’t buying the glass-half-full attitude. “JPMorgan’s results were surprisingly weak and were hampered by uncharacteristically poor expense management” wrote Octavio Marenzi, CEO of consultancy firm Opimas, in the aftermath of last week’s report. JPMorgan’s banking peers Wells Fargo also weighed in with a downgrade to JPMorgan stock. Analyst Mike Mayo moved them from Overweight to Equal Weight and trimmed his price target from $210 to $180.
Considering A Position
The good news is that this still suggests an upside of some 20% from Tuesday’s closing price, and would put the stock not only back above its pre-earnings level, but at fresh all-time highs. With this in mind, is it fair to think that the week’s drop is an over reaction, and that a bargain might be on the cards?
Any investor getting involved should do so with the right time horizon in mind. With JPMorgan indicating that there are fresh headwinds starting to appear, you can’t expect this to be one of the top-performing stocks in 2022. But as Wells Fargo’s Mayo summed up, JPMorgan is still a “good long-term company”.
The stock’s RSI is approaching 30, and so starting to indicate extremely oversold conditions. It also has some decent support around the $150 which was held multiple times last year as the stock consolidated after bouncing back hard from its pandemic inspired crash. It’s important to remember that JPMorgan is still paying a healthy dividend, and still turning a decent profit. There’s likely going to be some volatility in the coming sessions as the market tries to find a new fair value price, but once it has steadied, it’s fair to think that shares will start trending higher again. After all, it was only last month that UBS analyst Erika Najarian picked JPMorgan as one of her favorite US large cap banks, and gave them a Buy rating.
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