Why JPMorgan Will Fall Despite Buffett Bounce

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

JPMorgan Chase & Co's (JPM) shares increased over 2% this week on news that the world's most famous investor, Warren Buffet and his Berkshire Hathaway Inc. (BRK.A), had bought over 35 million shares of largest U.S. bank. Despite the big news, technical analysis suggests that JPMorgan's stock may slide 7% in the coming weeks, taking the stock back to its lowest levels in 2018. 

The stock has already fallen 8% from its 2018 highs, but still, the bank faces slowing growth in 2019. Meanwhile, despite the slide, the stock is still expensive when compared to its historical valuation. 

JPM data by YCharts

Trending Lower

The chart shows the stock has been trending lower since July and is now heading towards technical support at $106.50. Should it drop below that level of technical resistance, it may slide to $102. Another bearish sign is the 50-day moving average moving below the 200-day moving average. The technical formation is known as a death cross, and it suggests that the stock faces a further decline. 

The relative strength index has been trending lower since January, and it indicates that momentum is leaving the stock. A bearish indication that is also pointing to steep losses for the stock. 

Historically Expensive

Despite the stock's pullback from its highs, it is still trading at a price to tangible book value of 2.1. That is at the upper end of its historical range going back to the year 2010. During that period the ratio has traded in a range of 1.1 to 2.25. It means that the stock is expensive compared to its historical range. 

JPM Price to Tangible Book Value data by YCharts

Additionally, earnings growth is expected to slow materially in 2019 to 7% down from 36% in 2018. Revenue growth is also forecast to fall to 4% down from 11%. It is likely the primary reason why the stock is trading at a 2019 PE ratio of 11. Because when adjusting for that slowing earnings growth the stock trades at a PEG ratio of 1.7, which is high. 

The bank may also continue to face headwinds from a flat U.S. yield curve which may have a negative impact on interest income. Additionally, higher interest may hurt the bank's ability to grow its loans. It creates a number of potential problems over the short term that may weigh on the stock. 

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.