JPMorgan Chase & Co. (JPM) is likely to remain a stellar bank for the foreseeable future. But the long streak of outperformance of its stock is likely nearing its end, if it isn’t already finished. Under the guidance of CEO Jamie Dimon the bank has weathered some of the most tumultuous years in financial history and it has not gone unnoticed by investors. But that recognition of operational superiority is now fully priced into the bank’s stock, leaving little room for further outperformance, according to a recent story in Barron’s.
Shares of JPMorgan are outpacing the broader market this year, up nearly 22%, which has brought the bank’s total market capitalization to more than $380 billion. In comparison, Bank of America Corporation (BAC), Wells Fargo & Co. (WFC), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) have market caps of $275 billion, $214 billion, $157 billion, $77 billion and $72 billion, respectively.
- JPMorgan up 95% over last five years, well above its peers.
- Total market cap of $380 billion.
- P/E ratio at nearly 25% premium above average multiple of rivals.
- CEO Jamie Dimon has been CEO since 2006.
Aside from Bank of America’s impressive 75% gain over the past five years, JPMorgan’s 95% rise is more than triple that of the other four big bank rivals. That rise has pushed the bank’s forward price-to-earnings ratio (P/E ratio), a key valuation metric, to 11.35. That means the stock is now trading at a nearly 25% premium to the average forward multiple of its peers.
Buckingham Research’s James Mitchell argues that premium is an indication that the stock is reaching the limits of its outperformance relative to its peers. “[A]fter materially outpacing the peer group in recent years,” he wrote in a note to clients, “much of the fundamental outperformance is being priced in.” Mitchell downgraded JPMorgan’s shares from Buy to Neutral.
But that doesn’t mean the bank’s performance will falter. It just means the stock price is reflecting investors’ opinion that JPMorgan has reached an operational efficiency for which other banks are still striving. Much of that efficiency is due to the work of America’s top banker, Jamie Dimon, who was quoted by Barron’s earlier this year saying, “It’s build, build, build, do right by your customers and communities, and the stock will take care of itself.”
It’s a business philosophy that seems to have panned out well for the 63-year old banker who first took the helm at JPMorgan in 2006. Since then, he has led JPMorgan through the worst of the 2007-2008 global financial crisis, the Great Recession that followed, the increased regulatory requirements ushered in by the Dodd-Frank Act, and the era of incredibly low interest rates that continues to this day.
In its most recent quarterly earnings report, the bank reported profits that rose 16%, with profit on lending operations rising 7%. Earnings per share came in at $2.82, above the $2.50 average estimate of analysts polled by FactSet, according to the Wall Street Journal. While being another three-month record for the bank, recent interest rate cuts by the Federal Reserve are likely to cut into net interest margins. Further cuts would exacerbate that problem.
But one of the biggest new threats to the traditional banking industry is technology, specifically the fintech variety. But Dimon’s focus on ‘build’ has meant heavy investment in new technology, setting JPMorgan up for continued dominance even in the new technological age. Thus, while outperformance may be off the table for the near future, JPMorgan is likely to remain a strong investment for the long-term investor.