JPMorgan Is Best of Breed: Fund Manager

BOSTON ( TheStreet) -- As some investors in JPMorgan Chase ( JPM) will follow the bank's fourth-quarter results, due Friday, to see if there's a dividend increase, Robert Bacarella says the bank's outlook is of greater importance.

Bacarella, manager of the Monetta Young Investor Fund ( MYIFX), purchased JPMorgan along with Bank of America ( BAC) and Citigroup ( C) as a package on expectations the banking sector is on the mend. JPMorgan "is the cream of the crop," the manager said.
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"We're starting to see an improvement in earnings after the whole episode in 2008 with the financial crisis," he says. "We pay attention to price movement as a leading indicator. We're seeing increasing buying coming into the banking sector from institutions. We're seeing price movement that is beginning to exceed six-month highs. Plus, the outlook is beginning to improve."

JPMorgan is the fund's top pick in the banking sector, and Bacarella expects the stock to easily outpace the broader market this year. For the Monetta Young Investor Fund, that's a critical characteristic when it comes to portfolio management.

The Monetta Young Investor Fund's key objective is to beat the return of the S&P 500, which it accomplishes by investing about half of its net assets in funds that track the S&P 500. The remaining assets are devoted to industry leaders with highly recognizable brands. In addition to JPMorgan and the other bank stocks, the fund counts Apple ( AAPL), Ford ( F) and Google ( GOOG) among its holdings.

In terms of performance, the Monetta Young Investor Fund performs as intended. The fund has average annual returns over one and three years (23.7% and 10.7%, respectively) that handily beat the S&P 500 (12% and minus 15%, respectively). Since its Dec. 12, 2006, inception, the fund has an average annual return of 9.1%, compared with a 10.8% decline for the S&P 500.

Although Bacarella expects JPMorgan to outpace the market in 2011, he acknowledges that he has concerns as the bank preps to release its fourth-quarter financial results. In particular, Bacarella is cautious in his enthusiasm about what JPMorgan CEO Jamie Dimon will offer in terms of business outlook.

"The real issue will be guidance: What is going on with the whole housing market, and to what extent will the legal environment allow them to do what they have to do to clean up their balance sheet with bad loans and foreclosures," Bacarella says. "I want to see the indication that things are brighter as we go into this year and 2012. These things don't just turn overnight; it takes time."

While he will watch to see what JPMorgan reports for earnings compared to expectations, Bacarella says much of his focus will be on where JPMorgan is getting its business from. As the leader of the banking sector, Bacarella says what JPMorgan says about its business will be a reflection of basic economic growth.

"Are they making more loans to corporations? Are they going to loosen up in terms of consumer refinancing? I want to see improvement in confidence that they think the worst is now well behind us," he says. "I don't expect them to be very aggressive. But I want to get some confirmation from them that we are beginning to back into an expansion mode in the economy. I hope that is reflected in some of their comments."

Investors, though, are clamoring for news of a potential dividend increase. Dimon said this week that he would like to increase the dividend in the second quarter, which provided a boost to shares. Bacarella downplays the importance of a dividend increase and tempers the enthusiasm over a dividend announcement.

"I'm not buying JPMorgan for the dividend. It will be additive, but it won't be significant," he says.

Bacarella's view that JPMorgan will outperform the market in 2011 is based on his sector view of banks. While he says JPMorgan is "by far the best of breed," he anticipates that the entire sector will lead the advance in the market.

"It would not surprise me to see this sector do considerably better than the S&P 500 Index," he says. "The financial sector, which has lagged most of the other sectors, is beginning to show signs of life. I'm really believing that the financial group will be the market leader. I expect more alpha coming from this sector, significantly outperforming groups that had their year in 2010."

Bacarella says the fund will not be adding to its position in JPMorgan based on earnings, as he is happy with the weighting in the portfolio at this point. JPMorgan is the fund's fourth-largest position, accounting for 1.6% of its net assets as of Sept. 30. No other financial stock ranks in the fund's 10 largest holdings.

However, he doesn't expect that JPMorgan will be the best performer if and when the banking sector bounces back in 2011. "It will be a leading stock, but things with more risk, like Bank of America, wouldn't surprise me if they outperform JPMorgan," he says. "There is more risk involved in other names, but they tend to move in tandem. We made a nice profit since we bought them, but the real play is next year."

-- Written by Robert Holmes in Boston.

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