The market could be overly enthusiastic about this financial services giant.
JPMorgan Chase (JPM 1.73%) has been a successful investment, with shares producing a total return of 365% in the past decade, a much better gain than the S&P 500. That outperformance still holds true if we look back one, three, and five years.
Now, this top bank stock is trading in record territory, with a massive market cap of $599 billion (as of July 25). Is it still a good buying opportunity?
Posting strong results
Shares of this leading bank have performed well this year at least partly due to strong financial performance. This was certainly true in the three-month period that ended June 30, which the business recently reported. The headline figures came in ahead of Wall Street expectations.
Revenue jumped 20% year over year to $51 billion, driven by an impressive 46% surge in investment banking revenue. The business also posted diluted earnings per share of $6.12 in Q2, up 29%.
Net interest income (NII), which measures the difference between the money made from interest-bearing assets and the money spent on interest-bearing liabilities, is a key metric shareholders need to watch. The general belief is that banks must pay higher rates on deposits, in an effort not to lose this low-cost source of capital. However, given that they have longer durations, the yield banks are earning on their outstanding loans hasn't risen enough to offset the higher cost of capital.
This unfavorable scenario should be a headwind to NII. For JPMorgan, though, NII rose 4% year over year in the second quarter to $22.9 billion. The bank has been able to successfully handle higher interest rates, with revenue and earnings soaring in the past couple of years.
While it's easy for the market to get excited about the company's prospects, looking ahead, CEO Jamie Dimon is a bit more cautious. He thinks there's a very real possibility that inflationary pressures will persist. As a result, interest rates will need to remain elevated for longer. This backdrop simply increases the chances that the U.S. economy doesn't achieve a soft landing, with the potential for a recession on the horizon.
Premium price tag
It's hard to argue that JPMorgan isn't a high-quality business. It's one of the best banks investors can consider owning in their portfolios.
However, the stock looks expensive right now. It trades at a price-to-book (P/B) ratio of 1.9. Shares have rarely been more expensive in the past decade. Investor optimism has soared in the past nine months.
Of course, that valuation would be justified if JPMorgan was about to clock phenomenal growth in the years ahead. This doesn't seem to be the case, though.
According to Wall Street consensus analyst estimates, JPMorgan is expected to increase its earnings per share by just 10% between 2023 and 2026, or about 3% per year. These analysts might be factoring in lower interest rates during this forecast period. That muted bottom-line projection isn't anything to get excited about.
Let's assume the P/B multiple expands from 1.9 to 2.5 over the next three years. This would add 32% upside just from a valuation perspective. However, the stock hasn't traded at this high of a P/B ratio since 2004.
Even in this optimistic scenario, the shares only have a hypothetical upside of 42% over the next three years, translating into a potential 12% annualized return. Given how expensive the stock already looks, I'm not willing to make that bet. Therefore, it's best to pass on JPMorgan Chase until the price becomes more attractive.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
