JPMorgan's Stock Poised to Fall 12%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Shares of JPMorgan Chase & Co. (JPM)  are already 9.3 percent off their highs from early January, and there still may be more declines ahead. Based on an analysis of the technical chart shares of the bank stock may be poised to fall as much as an additional 12 percent.  One significant headwind, a slowdown in the strong earnings growth the company has seen thus far in 2018, which is expected to fade away in 2019. 

The prospect of JP Morgan’s stock decline comes as many big global banks outside the US have fallen into a bear market, and as some investors are forecasting US banks will outperform in the coming months. 

JPM Chart

JPM data by YCharts

Bearish Chart

The bulls may want to consider the warning signs the technical chart is showing for JP Morgan's stock. The pattern in the stock is of a falling triangle, a bearish continuation pattern. The price is currently just resting above technical support at $106.50, with shares trading at roughly $107.55. Should shares fall below that support the stock could fall as far as $94.75, a drop of about 12 percent, to its next significant support level. There is a weaker level of technical support at $101.30, as well, and would represent a decline of only 6 percent. 

The chart also shows that the relative strength index (RSI) is trending lower and has been falling since January. It suggests momentum is coming out of the stock, another bearish sign. 

Slowing Growth

Earnings for JP Morgan look strong in 2018, expected to rise by over 30 percent to $2.23 per share, while revenue is seen climbing by just over 7 percent to $27.3 billion. But the significant growth rate this year melts away in 2019, with earnings growth slipping to only 8 percent, while revenue is seen rising by 3.8 percent, as the benefit from tax reform normalizes. 

Headwinds

JPM Price to Tangible Book Value Chart

JPM Price to Tangible Book Value data by YCharts

Another obstacle is the company's valuation, with a price to tangible book value of about 2.1. That price to tangible book value is nearly at its highest level in almost ten years. 

The flattening yield curve also stands as a headwind for the stock, having a negative impact on the bank's net interest income. The spread between the 10-year US Treasury yield and the 2-Year US Treasury yield is only 35 bps, its lowest level since 2007. 

It would seem the bank has some fundamental factors that are paving the way for the outlook the technical chart is suggesting, and that might mean more declines lie ahead. 

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 holdingsInformation 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.

 

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