Followers of Barry Schwartz’s articles will recall that value investors await opportunities in the market by swinging at “fat pitches.” A fat pitch is intended to provide the investor with a margin of safety by protecting him against downside risk. “The fat pitch happens when … a stock drops [and] suffers a large but solvable problem.”
The latest fat pitch can be found in Wall Street investment bank JPMorgan Chase.
Following disclosure on May 10 of a bad trade inside the company’s synthetic credit portfolio, the stock price fell 12.2% over the next two days from $40.74 to $35.79.
CEO Jamie Dimon described the $5.1B loss on a July 13 conference call as an isolated incident. “In spite of this accident, this event doesn’t change what has been the bedrock at JPMorgan Chase for the last 5 years. We’ve always believed in high capital. One of the reasons you hold capital is for known and unknown events. We can never say that we won’t make mistakes. We operate in a risk business. Hopefully they will be small, few, and far between.”
$5.1B is a large number. However, additional numbers are needed to put the loss into proper perspective.
- $2.3 trillion: the total assets on the balance sheet.
- $97.2 billion: the total revenues earned in 2011.
- $4.7B: the total net income applicable to stockholders in 2008 during the worst financial crisis since the Great Depression.
- $17.6B: total net income applicable to stockholders in 2011.
- $4.33/share vs. $4.48/share: earnings per share pre-crisis in 2007 versus earnings per share last year.
- -71%: the quarter-over-quarter decline in loan loss reserves set aside for bad loans.
- $15B: share buyback program approved by the Federal Reserve in March 2012 following a government-simulated stress test that assessed JPMorgan’s capital strength given 13% unemployment, an 8% GDP contraction, and a 20% drop in home prices (all transpiring the same quarter).
- $17.1M: the amount of JPM stock CEO Jamie Dimon bought for himself personally on June 20, 2012.
- 1.53: the deposit-to-loan ratio.
The most intriguing number of all, however, is the bank’s tangible book value (TBV). Throughout the credit crisis and all quarters since, the stock price has rarely dropped below its TBV. From 2006-2011, JPMorgan’s average Price/TBV has been 1.65x. In 2008, it dropped as low as 1.2x. Today, the stock trades at only 1.03x. By comparison, Canada’s two largest banks (by market capitalization), RBC and TD, both trade around 2.7x their own TBV.
With 2011’s record earnings expected to be surpassed this year and a growing book value over time, the company has demonstrated its ability to grow in both good times and bad. It has always been a great company, but only recently became a cheap stock. Clearly, this is a fat pitch opportunity for investors and unsurprisingly represents our latest trade for many clients.
*Disclosure: clients of Baskin Financial Services Inc. own shares of JPMorgan Chase.