Investors continue to be enamored with businesses capitalizing on the ongoing artificial intelligence (AI) trend. However, boring companies have produced incredible performance, too.
Just look at JPMorgan Chase (JPM -0.81%). The money-center bank has produced a total return of 93% in just the last 24 months (as of Dec. 10). For comparison's sake, the S&P 500 generated a total return of 57% during the same time.
Is this top financial stock, which is trading just off its record high, a buy, sell, or hold right now?
The case to buy and hold
Every investor is likely familiar with JPMorgan, one of the world's leading financial services organizations. There are four key reasons investors should consider buying the stock.
Jamie Dimon, the bank's chief executive officer since 2006, is arguably one of the best executives of the past couple of decades. He successfully led JPMorgan through the Great Recession, helping build the business into the behemoth that it is today. Investors should appreciate companies that have a competent and proven CEO at the helm.
JPMorgan's diversified revenue streams are another reason buying the stock makes sense. The business has a presence in various areas, like consumer and commercial banking, capital markets, and asset management. Strength in any segment can more than offset weakness in another, which provides some stability.
It's easy to figure out that JPMorgan possesses a wide economic moat. Tremendous scale allows the company to spread out its fixed costs over a huge revenue base, leading to consistent profits. And the JPMorgan Chase brand is certainly highly regarded on a worldwide stage, helping build trust and attract new customers.
The company's latest financial results are also noteworthy. Revenue rose 7% year over year in Q3, while diluted earnings per share (EPS) dipped just 1%. Bank of America, a top competitor, posted a 0.7% revenue increase and a 10% diluted-EPS decline in the third quarter. JPMorgan's better financial performance, compared to a rival, should give investors confidence.
The argument for why shareholders should hold onto the stock is the same as the reasons for buying. JPMorgan has a great CEO, diversified business lines, competitive strengths, and solid financial results.
Why JPMorgan shares are a sell
Based on the various factors I just outlined, investors who don't already own shares might be wondering why JPMorgan isn't in their portfolios. Of course, valuation is a critical variable that can't be overlooked. It's one obvious reason to sell the stock.
As of this writing, the shares trade at price-to-book and price-to-earnings ratios of 2.1 and 13.5, respectively. These are about the most expensive valuations that the stock has carried in the past three years and a clear demonstration of how the market's perspective has become more bullish toward JPMorgan. If you pay a lot for a stock, future returns will be disappointing.
Another reason investors might want to sell is that banks experience cyclicality, which makes them difficult to own. An increase in unemployment or a decrease in consumer spending and corporate investment, for example, could send the economy in the wrong direction. The market is excited about the prospects of lower interest rates, but the possibility that a recession may happen is always present.
If it does, it could have a huge impact on JPMorgan's financial performance. As of Sept. 30, the bank had a huge $1.3 trillion loan portfolio. A recessionary scenario would undoubtedly lead to higher defaults, resulting in reduced earnings or even losses for the company. The fact that it's impossible to predict economic downturns means investors shouldn't ignore this risk.
JPMorgan's long and storied history makes it easy to label this as a high-quality company, and most people wouldn't disagree with that assumption. However, I believe the current valuation is steep, so shareholders who have benefited from huge gains in the past couple of years should consider selling.
