My #1 Bank Stock to Buy Now!

We’re 10 years removed from the Global Financial Crisis…

Yet one sector of the stock market is still reeling from the fallout.

I’m talking about the big banks.

Just look at the valuations of the largest financial institutions relative to the rest of the market.

Chart

The current valuation of the financial sector relative to the rest of the market currently sits in the 97th percentile of where it has been over the last half century.

This means that financial stocks have only been cheaper 3% of the time.

We are in unusual territory here valuation-wise.

At these metrics, history tells us that financial stocks have little downside and lots of upside.

But cheap is only half of the story, and maybe not even the most important half…

U.S. Financial Institutions Have Never Been Healthier

The Financial Crisis forced our financial sector to write-down all bad assets and recapitalize. It also forced banks to put in place much more rigorous lending and monitoring practices.

The transformation of this industry is clearly evident through the stunning improvement in key financial ratios of the U.S. banking sector.

Going into the Financial Crisis, the U.S. banking sector had a Tier-1 core risk-based capital ratio of 7%.

(This ratio is a key measure of a bank’s financial strength. The smaller the percentage, the less capital the bank has relative to risky assets.)

Today, that ratio has doubled to 13%, meaning banks have nearly twice the capital that they did a decade ago.

Liquidity-wise, the improvement is even bigger.

The liquidity ratios of U.S. banks have gone from 5% ten years ago to almost 15% today. That is triple the amount of liquid cash the industry has on hand to allow it to weather a financial storm.

Liquidity Chart

My point is this — balance sheets in the financial sector are now squeaky clean.

If there was ever a time that our financial sector shouldn’t trade a historical valuation discount, it is right now when the industry is in a strong financial position.

Yet it does, which is what makes the sector an excellent place for investment dollars today.

J.P. Morgan is the Simple Way to Take Advantage

Sometimes the most obvious opportunity is the best one.

Headed by CEO Jamie Dimon, most analysts believe that J.P. Morgan Chase & Co. (JPM) is the most well-run major financial institution in our country.

With the entire sector out of favor, J.P. Morgan offers us today a stock that is:

  • Inexpensively valued
  • Financially stronger than ever
  • And run by the best CEO in the business

What more could we ask for?

Well… how about the fact that Warren Buffett has purchased $6 billion worth of J.P. Morgan shares over the past two quarters?[1]

That is a pretty good stamp of approval and certainly not a subtle sign that J.P. Morgan shares are a great value.

And nothing made clearer that J.P. Morgan is the gold standard of banking than how the company stood tall through the Financial Crisis.

In fact, J.P. Morgan was the only large financial institution to post a profit during that time.

What differentiates J.P. Morgan from the other big banks is Dimon’s obsession with always operating the company on the foundation of a “fortress balance sheet.”

J.P. Morgan is managed with the mentality that the company must always be prepared for the chance that an unprecedented financial calamity can come out of nowhere.

Dimon’s always be prepared for war mentality is why J.P. Morgan didn’t just stand tall during the Financial Crisis, the company was able to exploit it by acquiring both Bear Stearns and Washington Mutual for pennies on the dollar.

Those acquisitions didn’t just create tremendous value for J.P. Morgan shareholders, they went a long way to keep the global financial system afloat.

This may sound dramatic, but it is true!

J.P. Morgan is a huge business. Currently the company has more than $2.5 trillion in assets and $250 billion in stockholder’s equity.

With a price-to-earnings ratio that is just barely out of the single digits and a near 3% dividend yield, J.P. Morgan is the perfect way to exploit this fifty-year low in financial sector valuations.

Here’s to looking through the windshield,

Jody Chudley

Jody Chudley

Financial Analyst, The Daily Edge
EdgeFeedback@StPaulResearch.com

1 BERKSHIRE HATHAWAY INC, Whale Wisdom

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Jody Chudley

Jody Chudley is a contributing analyst to Lifetime Income Report and Contract Income Alert. Jody is a qualified accountant with a degree in Finance from Brandon University. After spending fifteen years in various finance and planning roles with an international financial institution, Jody set out to manage his portfolio on a full-time basis.

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