In wondering whether or not to make an investment case for JPMorgan Chase ($JPM), I’m reminded of something Warren Buffett said: “It takes 20 years to build a reputation and five seconds to ruin it. If you think about that, you’ll do things differently.”
I think this is exceptionally true for JPMorgan. It is fair to say there is a considerable amount of regret from its management, in particular from CEO Jamie Dimon. The company earned Wall Street’s respect for managing the credit crisis much better than its peers including Bank of America ($BAC) and Citigroup ($C).
Then, suddenly, it all evaporated and its “cleaner bank” image was gone. Since early April the stock has lost almost 25% of its value after reports surfaced the company had a huge credit-derivative loss. However, earlier this month the bank said the poor trade had actually reached loss levels of almost $6 billion this year, with a chance of possibly reaching $7.5 billion when it is all said and done.
The company’s (initial) announcement of a $2 billion loss, coupled with the ongoing fiscal concerns of Europe, demonstrate how banks were caught in the cliche of “one step forward, two steps back.” Unfortunately, the news arrived just when it appeared the financial sector was rebounding — that, although investors had become less trusting of financial stocks, the market was prepared to offer a slight pardon for past indiscretions.
However, to the company’s credit, it has acted accordingly and management has cooperated as best it can to bring transparency to what was really a murky situation involving complex deals that required a accounting PhD to understand. But it does not change the poor timing of it all.
What is clear these days is JPMorgan is saying and doing all of the right things. While I would not put it in the category of the BP ($BP) oil spill in the Gulf of Mexico a few years ago, there are some similarities, particularly with the loss of trust and the public relations disaster that was caused.
JPMorgan’s challenge was to find a way to repair the damage and regain the confidence of investors. At the onset it would appear that the company seems committed to doing this.
Case in point: Last week it was revealed CEO Dimon and his wife bought over $17 million worth of the company’s stock. While the Dimons may actually see value in the stock (as I do), I can’t help but consider this to be a good PR move, a way to show confidence in the bank.
The question is, should investors buy in as well? Has all of the bad air been let out of the stock? Its recent earnings report would suggest that to be the case. I think saying JPMorgan did as well as can be expected would be an understatement. The bank reported net income of $5 billion, or $1.21 earnings per share. It produced solid results in its retail banking as well as Treasury services. What’s more, it generated lower-than-expected losses on loans. It showed considerable improvements in key areas such as mortgage loan origination which was up 29% annually and 14% sequentially.
Also showing growth were mortgage loan applications, which surged 37% from the previous year and 12% from the first quarter. So there are plenty of reasons to be optimistic about the company’s chances for a recovery.
JPMorgan was once known as the “cleanest shirt in the dirty hamper.” While it was not a glowing endorsement, it was certainly preferred over being considered the villain within a sector where many of its peers are hated. I think it will take some time for the bank to regain some of that lost trust, but it’s not an impossible feat.
From an investment standpoint, I would certainly agree with the Dimons and would buy this global banking franchise as the stock is trading below its long-term potential. This article is commentary by an independent contributor, separate from Wall Street Playbook’s regular news coverage.