Monday, May 14, 2012

JPMorgan Bomb

It wouldn't be fair if I didn't talk about JPMorgan's fiasco at all, so let's just go over what's happened since the revelations late last week.

Since the news broke about JPMorgan's $2 billion loss in its CIO (Chief Investment Office) divison, the stock has been taken out to the woodshed and demolished. It is currently down about 12% from when the news broke. The stock sat just under $41 previously, and is currently just under $36.

While $2 billion is not a lot of money when put into the context of how much money the CIO of JPM manages (something in the order of few hundred billion), it leaves investors wondering what else could be going on that we don't know about.

Heads have already begun to roll over the weekend, with many top level managers of the CIO resigning or leaving, being replaced by others. How does this affect us, the average investor?
As a long term investor, we need to take a 35000 feet view.

The main implications of this event from a long term view is its direct impact on the reputation of JPM and Jamie Dimon, as well as its impact on upcoming regulations. Both of these will certainly have effects on the valuation of JPM, the stock, but as usual, the market tends to overreact. Is the $20 billion market cap wiped off since the news was released justified? This is what you need to ask yourself as an investor, before deciding whether to buy or sell JPM.

JPM aside, here are some other names that are at interesting valuations

McDonalds (MCD)
- 17x PE, 3.1% yield, 11% off its recent highs
- MCD is selling off mainly because of its missed April same store sales comps of 3.3% vs 4%
- people also worried about its exposure to European weakness
- My View: I think the worries are overblown, and these prices seem fair for an amazing cash machine. Good to initiate here as a long term defensive holding. Wait a bit to add.

General Dynamics (GD)
- 9.7x PE, 3.1% yield, 11% off its recent high
- GD has been channeling since late 2009 between high 50s, and high 70s
- main worry here is defense spending cuts by the US government
- My View: I much prefer to buy GD in the low 60s or high 50s, where it has shown it has found support, but in general I think defense names won't go anywhere near term, so only buy if you have a very long term view

- 19x PE, 3% yield, about 7% off its highs
- UPS looks like it is in correction mode after its recent rally
- low oil and gas prices should help UPS a lot this quarter
- My View: I would wait a bit more on this. much more compelling at 74-75 or the low 70s

JPMorgan (JPM)
- 8x PE, 3.4% yield, 21% off its highs
- biggest issue with JPM isnt the stock itself, but the headline and regulatory scrutiny risk
- My View: I think aggressive investors can afford to dabble here, in the high 35s/low 36s, but be aware you might be in for a wild ride. stick with a MCD or GD if you can't stomach the volatility, as they both have much more subdued swings.

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