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JPMorgan (JPM, Financial) stock has lost approximately 20% of its market value since the turn of the year, which has come as a surprise to many considering the stock's high profile and historically low volatility. I believe that JPMorgan stock could soon recover; here's why.
Unjustified selloff
The general market narrative is that big banks recently sold off due to a slowdown in the equity markets, credit losses in Russia and slower than anticipated interest rate hikes. Nonetheless, JPMorgan managed to beat its first-quarter revenue target by $318.51 million.
From a quantitative risk vantage point, JPMorgan's recent drawdown is overdone. The company's historical monthly value-at-risk of 5% is 12.71%. This means that JPMorgan stock only draws down by more than 12.71% in a month 5% of the time. Even if the year-to-date slump in JPMorgan stock is warranted, quantitative evidence suggests that it almost never sustains a prolonged drawdown.
Rising interest rates and operating activities
Harvard Professor and ex-IMF economist Kenneth Rogoff believes the Federal Reserve will need to raise interest rates up to 5% to curb inflation back down to the 2% to 3% benchmark.
The Federal Reserve looks set to embark on a series of interest rate hikes amid multi-decade high inflation numbers. Most stocks suffer during rising interest rate environments. However, banking stocks tend to correlate with rising interest rates as their interest-bearing activities find support.
JPMorgan's interest-bearing activities make up 43% of its total revenue, and a rate hike could support the broader segment. Additionally, the bank's non-interest-bearing activities such as trading, wealth management and investment banking could also benefit from lower input costs.
Valuation
First off, let's examine a few style metrics. JPMorgan exhibits a good return on equity ratio (ROE) of 16.13%. Additionally, the ROE metric exceeds the stock's five-year average dividend growth ratio (14.99%), which suggests that the justified value is in check.
Furthermore, JPMorgan's price-earnings ratio is trading at a normalized discount worth 26.39%, suggesting that the stock is yet to reach its cyclical peak.
Finally, JPMorgan stock's price-book ratio of 1.43 could mean it's overvalued because banking stocks generally trade around their book value threshold (1.00). However, JPMorgan's price-book ratio is still at a normalized discount of 9.88%, and it needs to be considered that much of its assets could be trading above market value as the financial markets have been in a topsy-turvy period, leading to many assets being oversold.
The bottom line
I believe JPMorgan stock could be set to recover as a higher interest-rate environment coupled with robust operating activities could help the stock reach its fair value. JPMorgan is trading above its book value, but it needs to be considered that the company's assets may be undervalued after a trying time for financial markets.
