By Tom Essaye – Weiss Research
By now, you’re likely aware of the $2 BILLION loss by the “chief investment office” at J.P. Morgan (JPM). The firm’s stock has obviously suffered, and there has been plenty of negative commentary regarding the incident. But you should consider looking at this from a contrarian viewpoint and see if there are any opportunities in this incident.
The initial reaction whenever there is bad news like this is to sell first and ask questions later. And that’s usually the right move to make — at least in the very short-term. But the first question a contrarian investor must ask is: Is there opportunity in this news?
In order to find out …
You Need to Look a Little Deeper
First, you have to see if the incident is potentially catastrophic to the company. Second, you have to see if the incident is company specific, or indicative of a larger problem for the sector.
In the case of J.P. Morgan, it is indeed embarrassing. And it means lower earnings and by default a lower stock price. But it isn’t catastrophic. J.P. Morgan is simply too well capitalized to have such a loss put the solvency of the company into question.
And in looking at the sector, all the research so far shows that this problem is exclusive to J.P. Morgan, and not reflective of the sector as a whole.
So that should tell you there is a contrarian opportunity being presented by this crisis. In the case of J.P. Morgan directly, it is a question of at what price does shares in the company become an opportunity?
My reaction at this point is that the price is lower than the current value. But I seriously doubt the loss will stay at just $2 billion from this trade. Generally speaking, these types of trading losses could lead to further weakness in the shares over the coming weeks. Plus the difficult macro-economic environment could put more downward pressure on share price.
Contrarians should consider buying that weakness, as over the long term J.P. Morgan will recover.
I also believe from a sector standpoint, there is a …
Contrarian Opportunity in Regionals
When an industry leader stumbles, the entire sector can be sold off in sympathy, as nervous investors dump other stocks, afraid that it is not just an isolated incident.
As I mentioned earlier, the trading loss appears to be an isolated incident and limited to J.P. Morgan. But if you were to be very pessimistic, you could make the case that this is a peripheral negative for the large investment banks.
However, it doesn’t make any sense at all that this is negative for the regional banks, as they do not have large trading operations like J.P. Morgan. In fact, their business models differ substantially from the operations of the large, multi-national investment banks. So weakness in the regional banks is unwarranted, and that could be a sector where a contrarian opportunity lies.
One way you can play it is through the KBW Regional Banking Index ETF (KRX). This exchange traded fund is designed to duplicate the performance of the U.S. regional banking industry.
Remember that with every crisis comes an opportunity, and good contrarians always view a crisis in companies as a potential opportunity.
Best wishes,
Tom