JP Morgan Preferreds JPM+S
October 10, 2008 - 4:41pm EST by
north481
2008 2009
Price: 16.65 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 22 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT

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  • Preferred stock

Description

This (and other JP Morgan preferred stock issues) is a Buffett like preferred that Buffett cannot buy due to lower volume.  We can buy it big enough.  This idea's write-up is going to be short and sweet.  Frankly it doesn't take a heck of a lot of explanation or complicated charts to justify its purchase at these prices.  I honestly cannot explain exactly why these JPM preferred have fallen to the 9.5% yield levels.  It makes next to zero sense and represents a big, easy idea. 

The primary assumption that leads to this "big, easy" conclusion to buy these preferred is that JPM will be a survivor of this global credit crises.   The simple proof of this assumption is the behavior of JPM common stock.   JPM common closed at $41.50 today, up 13%.   JP Morgan is the "chosen one" in my opinion.  Most would agree.  The FDIC, Fed and Treasury will not let JP Morgan fail, period.   If JPM did fail, then we can honestly say that the global economy is damaged beyond repair and owning JPM preferreds will not matter anymore.  So, with the assumption that the market is half way right about JPM's survivability, JPM preferreds offer an equity like return from here. 

The problem is the volume, of course.  This idea is only realistic for smaller institutions.  But, it trades enough to accumulate shares.  It is widely known that these preferred are out there - for example, JPM+S, JPM+P, JPM+J, etc.- so clearly there are probably three reasons it is selling at these depressed levels.  (1) liquidation by forced sellers such as closed-end preferred funds with leverage (witness HPF) or (2) leveraged hedge funds being forced to liquidate or (3) fear that JPM needs so much capital that they will suspend its common dividend and therefore suspend its preferred dividends.  I doubt (3) heavily.  I believe factors (1) and (2) are viable reasons for the bargain prices.

Basically you get around a 9.5% coupon at a 35% discount to par value.   Spreads will likely come down eventually and this and the other issued preferreds of JPM will rise due to the spread contraction.  In the meantime, you collect a huge yield.

Total return over the next 1 year is about 50% with a 40% price recover to say, $23.   This would bring it to a 6.8% yield.  Seems reasonable to me in a year.  If it takes two years, then you get 30% annual returns if it recovers to $23 or a 6.8% yield.   And, if it takes three years, then 20% annual total return is likely.   So, between a 1 year recovery period and a 3 year recovery period, we should pick up between 20% and 50% returns on an annualized basis. 

Again, assuming the common is not going to zero and/or assuming that the dividend isn't suspended due to a severe lack of capital, then this collection of JPM preferreds are easy money. 




 

Catalyst

Credit crisis ends with JPM alive.
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