Thursday, October 13, 2011

Occupy JPMorgan Chase, Skip Goldman Sachs

The Occupy Wall Street idea -- living on the streets of cities large and small while carrying signs -- is going viral. Not only are the protesters fed up with Wall Street -- so are shareholders and employees who are either poised to lose their jobs or to get lousy bonuses. With  JPMorgan Chase (NYSE: JPM) posting less-disappointing-than-expected earnings Thursday, is the house of Dimon a better investment than Goldman Sachs (NYSE: GS)?

JPMorgan reported a 4% drop in earnings for the third quarter of 2011 -- much better than the 10% drop analysts had expected. JPMorgan blamed that 10% predicted drop -- the biggest in more than two years -- on Europe‚Äôs credit crisis and the U.S. debt- ceiling debate that it believes spoiled optimism for an economic recovery, according to Bloomberg.

As OWS protesters visited his Park Avenue apartment, JPMorgan CEO was considering the business challenges facing the bank, including:
  • 30% lower trading revenue compared to the second quarter of 2011;
  • 50% less investment banking revenue due to a drop from $2 trillion in corporate bond issues in the first half of 2011 to $550 billion in the third quarter;
  • A 10% drop to $3.96 billion in third quarter earnings estimated by 18 analysts surveyed by Bloomberg.
However, Dimon announced a higher-than-expected profit of $4.26 billion, or $1.02 a share Thursday morning -- a dime a share above expectations. But JPMorgan revenue fell 11% to $24.4 billion as a result of a drop in corporate securities issuance, difficult trading conditions, narrower profit margins and the elimination of overdraft and other penalty fees, according to DealBook.

Meanwhile, Goldman Sachs -- scheduled to report its third quarter results next week -- has suffered from a drop in trading business and said in July that it would cut about 1,000 jobs after its second-quarter drop in trading revenue was bigger than analysts estimated. And Goldman's third quarter report is expected to be its worst quarterly results since 2008 in the depths of the financial crisis.

Does this mean you should buy JPMorgan and avoid Goldman Sachs? Yes. Here's why:
  • JPMorgan: shrinking, highly profitable company; cheap stock. JPMorgan revenues fell 3.9% to $62.3 billion in the last year while its net income soared 81% to $18.6 billion yielding a whopping 30% net profit margin. But its Price-earnings-to-growth ratio (PEG) -- 1.0 is fair value -- is a cheap 0.55 with a P/E of 7.1 on earnings forecast to grow 13% to $5.18 in 2012.
  • Goldman Sachs: shrinking, moderately profitable company, dirt cheap stock. Goldman Sachs revenues are down 11% in the last year to $44.2 billion and its net income tumbled 36.7% to $5.92 billion while it earned a slimmer 13.4% net profit margin. And its PEG is very inexpensive 0.10 on a P/E of 9.8 with earnings forecast to grow 103% to $14.76 in 2012.
JPMorgan's up and down swings are less pronounced than Goldman -- that depends so heavily on trading for its profits.

If you're looking for a less risky bet, JPMorgan is your stock. If you like to swing for the fences, it might be wise to wait until after Goldman stock drops even further so you can get the biggest return on a gamble on a possible 2012 rebound.

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