James Dennin, Kapitall: Should big bank stocks worry about the fine given to JPMorgan, or is this an opportunity for value investors?
Usually when banks pay fines, especially the big ones, it's not something for them to write home about. The biggest fines levied against high finance have targeted several banks at a time – and typically have been negotiated down and settled at much smaller amounts.
Well, that was then. This is now.
JPMorgan (JPM) announced today they're shelling out $13 billion in fines for the mortgages they issued in the years leading up to the financial crisis. It's by far the largest amount of restitution a financial firm has ever paid out as an admission of wrongdoing. It also begs major questions – about what this will mean for the storied big bank, as well as its competitors.[Read more on Big Banks from Kapitall: John Thompson Says Ditch Tech, Buy Big Banks] After all, JPMorgan does a lot of business, and makes a lot of money. But that's $13 billion is roughly half the company's quarterly sales. It's hard to imagine how any business would be able to cope with that kind of hit, no matter how much money you're making. And yet at the same time, value investors will probably know that this might present something of an opportunity. As the market factors the new fines into JPMorgan's share price, it will be interesting to see if the bank can get any more undervalued than it already is. Investing ideas Considering JPMorgan's record fine, we decided to look for investing opportunities among big bank stocks and other financial firms. We began with a list of the major companies in the financial industry with market capitalizations over $10 billion. Then we looked for big bank stocks that are trading at least 15% below their book value, an indication that the company might be undervalued. Unfortunately, that didn't really narrow down our list at all. As Vilas Capital CEO John C. Thompson explains, almost all the big banks are tremendously undervalued right now. This is partly because new capital requirements have driven down their ROE, but also because the public still doesn't feel like big banks have been sufficiently punished. But that should all change, eventually. Whether or not the $13 billion fine will be enough to put the public's mind at ease, it's still too early to say. In the event that a turnaround is indeed imminent for America's most profitable companies, we found seven which are trading at least 20% below their Graham Number. A theoretical price determined by looking at book value per share and operating margins, a stock's Graham Number can be a strong indicator of undervaluation.