(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
JPMorgan Chase & Co's (JPM) stock has fallen 11% from its 2018 highs but the stock may still have further to drop. Technical analysis suggests that the shares may fall 10% more. Should that happen, the stock would be more than 20% off its high, putting it in a bear market.
Directionally, the options market supports this bearish outlook for the stock. The negative sentiment comes as analysts forecast slower earnings growth in 2019. Additionally, investors have been fearful of the impact a flattening yield curve might have on the richly valued bank's profitability.
Nearing Key Support
JPMorgan's stock has fallen below a critical level of technical support at $106.50. Now the stock is trading just above the next level of support at $102.50. Should the stock fall below that level of support, it could drop as low as $94.75 from its current price of $105.60 (as of 11:30 AM on October 25).
The relative strength index (RSI) has also been trending lower for the stock since peaking at an overbought level above 70 in January. It suggests that momentum is coming out of the stock. Additionally, the volume levels have been steadily rising as the stock has fallen. It would indicate there is a growing number of sellers.
The options for expiration on January 18 show that the number of bearish puts outweighs the bullish calls by a ratio of almost 3 to 1, with 13,000 open put contracts at the $105 strike price. For the buyer of those puts to earn a profit, the stock would need to fall to about $100, for a drop of around 5%.
One reason for the weakness is what is expected to be a significant slowdown in earnings growth next year. Analysts estimate that earnings growth will slow to 7% in 2019 from 36% in 2018. Meanwhile, revenue growth is expected to slow to 4% from 11%.
Additionally, investors have been very fearful of a flattening yield curve caused by short-term interest rates rising faster than long-term interest rates. This, too, may hurt the company's profitably next year.
Another factor weighing heavily on the stock is its valuation, which is not cheap. Currently, the bank trades at a price to tangible book value of almost 2. That is nearly its highest valuation in the past five years. With all the uncertainty surrounding the bank, and also considering its valuation, the stock seems ripe to continue its slow drift lower in the coming weeks and months.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.