JP Morgan then and since

Nearly 10 years ago, (in May 2012) I wrote a post (link below) correlating an overreaction in the fall in JP Morgan’s stock price to being similar to that of BP’s decline following an oil rig explosion.

https://robzdravevski.com/2012/05/16/anatomy-of-an-overreaction/

It’s timely to re-visit the anatomy of overreactions as investors are experiencing a new downdraft in stock prices and putting it into perspective when considering a longer investing horizon.

This first chart below shows JP Morgan’s stock performance up to those weeks in May 2012, JP Morgan stock fell 25% (from $44 to $33). It was quite an event to see a major financial institution lose a quarter of its market capitalisation in such quick order.

The stock price is no stranger to volatility but I do think volatility is the price an investor pays for longer term capital gains.

So, there you see a chart where JPM was trading at the same price it was 10 years earlier, with many of peaks and troughs.

Sympathetically, the S&P 500 also paints the same picture between 2002 and 2012.

The next chart shows JP Morgan’s stock price since then.

The result has been a 500% rise with plenty of dips along the way.

A Warren Buffet quote comes to mind, ‘Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years’.

And there lies a reminder that just because a company’s stock price is listed each day, one should be measured when making their next decision.

January 21, 2022

by Rob Zdravevski

rob@karriasset.com.au

Anatomy Of An Overreaction

JP Morgan announced that it lost $2 billion due to either a flawed hedging strategy or just bad trading.

Some reports cite that the loss is more like $1 billion when you account for the gains made on the other side of the hedge which the initial strategy was trying to protect or offset.

My question is to ponder whether JP Morgan’s stock price has overreacted.

The market capitalisation of JP Morgan prior to this news was approx. $161 billion.

It’s stock price has fallen near 14%, meaning it’s market cap has fallen $23 billion and now stands at $138 billion.

I’d like to compare it to BP’s 2010 Macondo oil rig disaster in the Gulf of Mexico.

Sadly, 17 men died as a result of this explosion and it crippled parts of the Gulf Coast economy, not to mention the environmental damage caused.

Prior to the rig explosion, BP stock was trading at $60 per share and its market cap was $190 billion.

2 months later, the stock had fallen to $27 and it market cap was $86 billion.

Today, BP’s stock price has risen 40% from that June 2010 low but more importantly, it’s stock price recovered the decline that it suffered following the sinking of the oil rig, within 4 months.

The financial settlement costs for this disaster is estimated to be near $8 billion.

Both companies; are making a net profit of approximately $25 billion per annum, have P/E estimates of between 6 & 7 for the next fiscal year and are trading just below their book value.

JP Morgan’s error doesn’t seem to be systemic, life-threatening nor open to punitive lawsuits.

Assuming that the JP Morgan loss will be $2 billion, the ratio of the financial loss compared to the fall in the company’s value matches the decline experienced by BP.

It looks like an overreaction.

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