According to a filing with the SEC, Timothy Flynn, a member of the Board of Directors at JPMorgan Chase & Co. (NYSE:JPM), directly purchased about 6,800 shares of the bank’s stock on January 29th at an average price of $46.93 per share. This roughly $320,000 investment brought Flynn’s total holdings of JPM to almost 15,000 shares. We track insider purchases because they tend to be bullish signals, though average outperformance of the market is very slight when only one insider is buying the stock (read more about studies on insider trading). Interestingly, earlier in January we had reported on an insider purchase at Bank of America Corp (NYSE:BAC). See our coverage of an insider purchase at Bank of America. We’d wonder if these buys might be interpreted as more general optimism on the large banks.
In the fourth quarter of 2012, JPMorgan Chase & co. experienced double-digit growth rates of both revenue and net income versus a year earlier. In fact, revenue was up almost 20% while earnings surged over 50%. While these growth rates are of course not sustainable, they suggest that JPMorgan Chase’s business is performing well in the current financial environment. In fact, given the current stock price, the bank does not really need to deliver any further improvements in order to be a good value: the trailing P/E multiple is only 9. With the rise in its stock price (up 25% in the last year, despite the London Whale fiasco), JPMorgan Chase’s discount to book value has narrowed and the current P/B ratio is 0.9. As a result JPMorgan Chase & Co. appears to be a good value and we can see why an insider would be buying the stock.
JPMorgan Chase, along with Bank of America, Citigroup Inc. (NYSE:C), and Wells Fargo & Company (NYSE:WFC) was one of the most popular stocks among hedge funds in the third quarter of 2012 (see the full top ten list). Billionaire Ken Fisher’s Fisher Asset Management more than doubled the size of its position during the quarter and closed September with over 13 million shares in its portfolio (check out Fisher’s stock picks). AQR Capital Management, which is managed by Cliff Asness, reported a position of 4.2 million shares in its own 13F filing (find Asness’s favorite stocks).
How does JPMorgan Chase compare to these peers as a value investment?
While Bank of America and Citigroup carry even greater discounts to the book value of their equity (Bank of America’s P/B ratio is 0.6 and Citi’s is 0.7), these two banks aren’t much more attractive than JPMorgan Chase when we look at their value in terms of earnings. Analyst consensus for 2013 has these two peers priced at 8 to 9 times earnings, in line with JPMorgan Chase, and Bank of America in particular has been struggling recently and so these projections are already pricing in a recovery in performance. We suppose that there is a case for considering Citigroup, since earnings growth was strong there as well last quarter, but JPMorgan Chase would seem to be a more reliable investment.
Barclays PLC (NYSE:BCS) carries a P/B ratio of 0.7, so its discount is similar to that of Bank of America or Citigroup. However, it has been reporting low earnings and the sell-side is less bullish on the company than those we’ve previously discussed; while a current-year P/E of 10 is not high, it is a premium relative to other large banks and so we would avoid the stock. Wells Fargo trades at 10 times trailing earnings and delivered a 24% improvement on the bottom line last quarter compared to Q4 2011. We’d say that in terms of earnings metrics it is cheap, and may also be a good buy if an investor is willing to invest in or at least look at multiple bank stocks, but at a market cap greater than its book value we think that we would prefer JPMorgan Chase. More generally, we would note that large banks seem cheap and we now have two that have seen insider purchases in the first month of 2013.
Disclosure: I own no shares in any stocks mentioned in this article.
