Following an exciting rally in recent months, shares of JPMorgan and Bank of America may now be running on fumes only, according to a senior Baird analyst.
David George recommends a more cautious stance on the two money center banks since their risk-reward profiles have become increasingly unattractive as valuations stretch and expectations soar.
Despite their reputations as “gold standard” institutions, the case for trimming exposure – or even selling outright – is gaining traction.
Why it may now be time to sell JPMorgan stock
JPM has handily outperformed the S&P 500 index this year, with shares currently up 35% versus their year-to-date low in early April.
But that outperformance did come at a cost – “valuation”.
JPMorgan shares are currently going for a record 2.9 times tangible book value and a forward P/E ratio of 15.5, indicating a lot of the good news is already baked in.
On Friday, David George downgraded JPM stock to “underperform” with a price target of $235 indicating potential downside of about 18% from current levels.
According to the Baird analyst, JPMorgan continues to boast an exceptionally strong balance sheet and retains its dominance in the financial services industry – but “future returns will likely not be what they’ve been the last several years at these valuation levels.”
Simply put, this best-in-class franchise will likely prove a poor investment given the expectations are too high.
With capital markets reopening and deregulation providing tailwinds, the bullish narrative is compelling – but perhaps too widely embraced. George’s contrarian view is that valuation still matters, and in JPM’s case, it may be signaling a ceiling rather than a floor.
Why it may now be time to sell Bank of America stock
BofA has also enjoyed a solid run in recent months, with shares up some 12% currently versus the April low. Still, David George downgraded the bank stock today to “neutral”.
His $52 price target on the Bank of America shares implies modest upside, but not nearly enough to justify fresh buying at current levels.
Baird had previously upgraded BAC in April – believing the market was underestimating the firm’s earnings power. But with the stock now reflecting improved net interest margins and a more favorable capital markets backdrop, he believes the easy gains are behind it.
“We remain huge fans of the BAC franchise,” he wrote, “but feel like the stock is largely reflecting it here.”
In short, while BofA stock may not be overvalued to the same extent as JPM, it’s no longer the bargain it once was – and that makes it a hold at best, or a sell for those seeking better asymmetric opportunities.
All in all, with both stocks trading near highs and sentiment running hot, now may be the time to take profits before gravity sets in, George concluded.
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