Brexit, Schmexit: This High-Yield Banking Colossus Is a Must Buy

Financial services stocks have taken a beating following the U.K.'s vote to leave the EU, but those fears are easing. Buy shares of JPMorgan Chase now ahead of earnings.
By John Persinos ,

What if financial pundits threw a crisis and no one came?

It is starting to dawn on investors that the U.K.'s vote to leave the European Union won't trigger a global contagion, as previously feared. The U.K. itself is likely to bear the brunt of the damage of the Brexit, while at the same time, signs abound that the U.S. recovery is gathering steam.

Accordingly, the S&P 500 closed at a record high Monday, with financial services one of the best-performing sectors. Investors are focusing on company earnings, especially those of several big banks.

Earnings per share for companies in the S&P 500 are expected to fall 5.4% for the second quarter, the fourth straight quarterly decline, according to research firm S&P Global Market Intelligence.

But judging by the recent stock market rally, investors have concluded that the "earnings recession" is about to end, as employment expands, oil prices stabilize, home prices rise and consumer spending increases.

This confluence of trends bodes well for the battered financial services sector in general and one in particular: JPMorganChase (JPM) - Get Report . After enduring a rough year so far, JPMorgan Chase looks likely to emerge as a growth stock winner this year and beyond.

JPMorgan Chase will report second-quarter earnings on Thursday. Results aren't expected to be stellar, but in the troubling context of high energy debt, lingering Brexit fears and turmoil overseas, the numbers are likely to reflect the company's inherent long-term stability and growth prospects.

With a market capitalization of $230.67 billion, JPMorgan Chase can add not only growth and income but also ballast to a portfolio.

With the Federal Reserve's delay and conflicting signals on interest rates this year, the financial services sector has gotten clobbered. Low rates make it more difficult for banks to make money.

However, Wall Street's disfavor is exactly what makes strong financial services companies such as JPMorgan Chase attractive value propositions, especially as the overall economic recovery appears to be on track.

Some financial services companies, notably JPMorgan Chase and Wells Fargo emerged from the financial crisis in better shape. Wells Fargo avoided the reckless practices that caused the crash, whereas tougher regulations forced JPMorgan Chase to clean up its balance sheet and adopt more prudent lending practices.

Compared with most of its peers, JPMorgan Chase boasts stronger fundamentals.

The company looks solid as measured by the major yardsticks of financial health: operating margin (36.74%); profit margin (27.32%); return on assets (0.96%); and return on equity (9.90%). These numbers largely outperform those of its peers Bank of America,Citigroup,Goldman Sachs and Morgan Stanley.

JPMorgan Chase, Wells Fargo and Citigroup are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells JPM, WFC and C? Learn more now.

Wells Fargo's balance sheet is comparably strong, but investors are already high on the stock, and it is pricier than JPMorgan Chase.

Energy sector debt continues to weigh heavily on the financial services sector, but according to a recent report from credit ratings firm Moody's, JPMorgan Chase is saddled with less risk from shaky energy loans than any of its big competitors.

Across the five major global investment banks -- Citigroup, Morgan Stanley, Goldman Sachs, Bank of America and JPMorgan Chase -- borrowings by oil and gas companies represent an average 2.3% of loans, but the ratio is just 1.5% at JPMorgan Chase. At the same time, energy prices appear to have finally turned around.

The average analyst consensus is that second-quarter earnings will come in at $1.43 a share, compared with $1.54 a year earlier. Third-quarter earnings are expected to fall to $1.40 a share, from $1.68 a year earlier.

Full-year earnings are projected to hit $5.60 a share this year and $6.26 next year, compared with $6 in 2015. 

JPMorgan Chase's trailing 12-month price-earnings ratio stands at 10.55, which is low compared with the financial services industry's trailing P/E of 12.88.

JPMorgan Chase shares are down more than 5% year to date, largely as a result of recession and Brexit fears, but the pessimism is lifting. Investors should buy the stock while it is undervalued and ahead of earnings.

The average median analyst 12-month price target on the stock is about $70, implying a gain of 12.41%. On the high end, the analyst one-year target is $79, which would represent a gain of 26.86%.

Meanwhile, the stock's juicy dividend yield of 3.11% is enticing in this environment of stingy yields. The payout ratio is 34%, about in line with JPMorgan Chase's peers, which means that the dividend is sustainable with plenty of room to grow.

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, Persinos held shares of Wells Fargo.

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