JPMorgan: Ray Dalio Is Betting Big

Ray Dalio

Kimberly White

Recently, Bridgewater Associates released its Q4 13F filing, which showed Ray Dalio's institution buying a important magnitude of JPMorgan Chase & Co. (NYSE:JPM) banal in nan quarter.

Dalio's biggest buys (WhaleWisdom)

In fact, not only did Dalio bargain important amounts of JPMorgan, his apical fourth-quarter buys were dominated by financials, pinch Bank of America (BAC), Citigroup (C), and Berkshire Hathaway (BRK.B) rounding retired nan remainder of nan apical 5 individual banal positions.

When I saw Ray Dalio buying JPMorgan banal successful nan 4th quarter, I wasn't surprised. As I've been saying for astir a twelvemonth now successful my sum of Bank of America and TD Bank (TD), banks are among nan champion types of equities for today's economical conditions. They aren't inexpensive astatine today's prices (11.7 times net is precocious by banking standards), but they're among nan fewer sectors that tin really summation from rising liking rates. Rate hikes are not guaranteed to summation slope profits: if they trigger a recession, aliases if nan output curve inverts, nan complaint hikes whitethorn wounded slope profitability. Nevertheless, it is astatine slightest imaginable for higher rates to amended slope profits, which is successful opposition to astir different industries, for which they simply summation nan costs of indebtedness and trim nan coming worth of earnings.

The only problem is that astir banking analysts cognize this, truthful banks aren't inexpensive correct now. However, successful December, slope stocks took a awesome dip, for reasons that aren't wholly clear. At that peculiar infinitesimal successful time, they were awesome buys. I upped my Bank of America position that month, and I wasn't amazed to spot Dalio buying large arsenic well.

An absorbing mobility is: "why does Dalio for illustration JPMorgan successful particular?"

Bridgewater's 13F showed Dalio and his squad buying 30% much JPM than BAC, which was their 2nd astir bought slope banal successful nan period. JPM is presently much costly than Bank of America, getting close to 12 times earnings - very pricey by banking standards. I personally for illustration BAC banal astatine today's prices, but arsenic I'll show successful nan ensuing paragraphs, JPM has a batch of things going for it that could make it a worthy buy, too.

Investments successful AI

One large point JPMorgan has going for it correct now is dense finance successful AI. These investments could supply ratio gains successful nan future. In 2017, JPMorgan utilized AI to complete 360,000 hours of finance activity (mainly filings) successful a fewer hours. It has an entire AI investigation division. It ranks #1 among banks successful nan Evident AI Maturity Index. In 2023, AI is nan talk of nan town. Some companies are gaining from it (e.g., OpenAI), others are perceived to beryllium losing from it.

Companies that unreserved retired AI products to consumers whitethorn beryllium astatine consequence of issues if nan AI creates liability. For example, Tesla's (TSLA) "full self-driving" has been blamed for galore crashes and Microsoft Corporation's (MSFT) Bing AI rollout has been marred by inaccurate accusation and moreover users being insulted by "Sidney" (the company's chatbot). It's not clear that blasting AI products retired to nan user is simply a wise strategy, but truthful far, JPM appears to beryllium utilizing AI to automate soul activity alternatively than to waste arsenic a product. So, location is simply a plausible lawsuit to beryllium made that JPMorgan will return nan lead successful ratio arsenic agelong arsenic it continues utilizing AI responsibly.

Profitability

Another point JPMorgan has going for it is profitability. Among nan 3 biggest U.S. banks, JPM is nan astir profitable, easy trouncing Citigroup and somewhat edging retired Bank of America. As nan array beneath shows, JPM has nan champion margins of nan group.

When it comes to nan 3 metrics that slope analysts look astatine nan astir closely, there's nary question: JPMorgan takes nan cake.

Now, of course, this is reflected successful nan stock's valuation. JPM currently trades at 11.7 times earnings, 3.4 times sales, 1.57 times book value, and 4.57 times operating rate flow. By contrast, Bank of America trades astatine 11.06 times earnings, 3.1 times sales, 1.15 times book value, and 38.51 times operating rate flow. Apart from nan rate travel aggregate (which tin beryllium misleading for banks, for reasons I'll explicate shortly), Bank of America is acold cheaper. So, pinch JPMorgan stock, you're paying up for nan profit and value you're getting.

Discounted Cash Flow Valuation

Usually, it's astatine this constituent successful an article that I'll see a terminal worth aliases discounted rate travel exemplary ("DCF") for a stock. In JPMorgan's case, utilizing free rate travel arsenic nan "earnings"/cash travel metric could origin problems, because erstwhile a slope loans money, it creates a rate outflow, but it's an outflow you want to spot occurring, arsenic that is straight utilized to bring successful early income. So, successful valuing nan coming worth of JPM's early earnings, I'll usage net per stock successful spot of free rate travel per share.

According to Seeking Alpha Quant, JPM's ttm EPS is $12.09. If you presume nary maturation and discount that astatine nan 10-year treasury (US10Y) output (3.8%), you get a terminal worth estimate of $316, an upside of much than 100% to today's price. If you adhd a 4.2% consequence premium, you get a $150 value target, which is still a flimsy magnitude of upside. 8.5% is nan discount complaint astatine which JPM ceases to person an upside nether nan zero-growth assumption. If you adhd a 5% CAGR maturation presumption (well beneath nan humanities 10-year CAGR growth), past you get a $147 value target moreover pinch a 10% discount rate. Overall, this scope of possibilities looks favorable for JPM. It has an upside successful much scenarios than not.

Risks and Challenges

On nan whole, JPMorgan looks for illustration a bully opportunity correct now. Its net and book worth increased past quarter, it's not overly expensive, and it's nan undisputed profitability champion among large banks. It each looks beautiful good. I would decidedly ain JPMorgan Chase & Co. banal if I hadn't had nan thought to bargain Bank of America first, and I person important vulnerability to it via nan Vanguard Financials ETF (VFH).

Nevertheless, location are risks and challenges to watch retired for, including:

• Increasing charge-offs and delinquencies. Most large banks are reporting increases successful charge-offs and delinquencies this year. JPM itself reported $877 cardinal successful charge-offs past quarter. Because of these expanding charge-offs, banks are having to raise their provisions for in installments losses ("PCLs"), which is eating into their profit growth. Bank of America's nett liking income grew 29% past quarter, yet its net only grew 3.8%, mostly because of nan PCL build (weakness successful finance banking besides played a role). JPM is affected by these factors, too.

• Valuation issues. 11.74 times net is reasonably pricey for a bank. Investors don't mostly expect banks to present immense profit growth, hence galore are not willing successful them erstwhile their multiples climb into nan double digits. Last quarter, Warren Buffett importantly trimmed each nan banks successful his portfolio, isolated from Bank of America. Charlie Munger later said that, while banks are doing well, they are starting to get pricey. It appears that large investors are sensing rich | valuations successful nan large banks. Notably, Dalio's large buys were successful December, erstwhile these stocks were overmuch cheaper than they are now.

• Continued weakness successful finance banking. Investment banking didn't thrive successful 2022. In its astir caller quarter, JPM's finance banking fees declined 52%. The logic why finance banks are doing poorly is because not galore group want to return companies nationalist successful this environment. Tech stocks are still measurement down from their highs, there's a consciousness that if you spell nationalist today, you won't raise arsenic overmuch money arsenic you would if you waited. So, nan weakness successful IB could proceed into 2023.

The JPMorgan Chase & Co. risks and challenges supra are worthy keeping successful mind. Nevertheless, it appears that Ray Dalio made nan correct prime by buying slope stocks successful December. He's sitting connected nan upside connected those buys, and if net move retired well, he whitethorn bask further upside still.

As for an investor considering buying now, he aliases she should support successful mind that slope stocks are coming much pricey than they were erstwhile Dalio bought JPMorgan Chase & Co. It's a constituent worthy mentioning. Nevertheless, you've sewage tech stocks coming trading astatine 20 times net while net and free rate travel diminution by precocious double-digits year-over-year. JPMorgan Chase & Co. is astir apt a amended bargain than galore of those names.

Financial journalist. Passed CFA Level 1. "Growth astatine a reasonable price" investor. Tech and dividend growth. Like classical worth plays arsenic good arsenic GARP-y tech stocks. Follow maine connected Twitter: twitter.com/AJButton2