05/15/2010 05:12 am ET Updated May 25, 2011

Should We Chase JPMorgan Chase?

Sounds insane. Your stockbroker rings you up with the name of a stock that "you just gotta buy." Your obvious first question: "What's it selling at? He tells you it's about $43 a share. So you do your due diligence and discover the stock is already a big winner, having shot up more than 100% from its 52-week low of $20 a share. Why, you wonder, didn't he call you when it was $20? What makes such a purchase seem even more questionable is that further due diligence reveals the stock sold as low as $14.96 last year, meaning it has soared nearly 200% from that low point of the past two two years and more than 15 fold from the $3.20 low it posted between 1987 and 2007.

Since everybody knows stocks don't go up forever and the rule is you buy low and sell high, not vice-versa, you come to an obvious conclusion: Your broker is out of his mind, the inmates must surely be running the asylum on Wall Street, and, of course, you say nuts to the stock.

In this instance, though, maybe a hearty hello to the stock, rather than a fast, dismissive goodbye, might be a wiser investment strategy. So, at least, is the thinking of Morgan Stanley's crack banking analyst, Betsy Graseck, who is strongly pitching the stock in question -- bank biggie JPMorgan Chase & Co. In effect, she's recommending purchase of the shares with an "overweight rating" despite their meteoric rise. The intrepid analyst, though, apparently has no trepidations because she figures it has the market muscle to balloon to $59 over the next 12 months, a gain of about 38% from current levels.

Why so gung-ho? For starters, Graseck is convinced we're in the beginning stages of economic healing with powerful credit improvements coming in the banks. Further, as credit costs fade with credit card losses peaking, she expects per-share earnings to rise as delinquencies accelerate in the first quarter and non-performing loans decline meaningfully in the first half. In fact, Graseck expects JPM to be one of the first banks with materially declining NPLs, partly because of its low exposure to commercial real estate.

On the earnings front, Graseck is forecasting a 17% year-over-year gain in 2010, and over the next three years a whopping 130% increase, driven primarily by declining credit costs. Further, she expects accretion from JPM's $1.9 billion acquisition of the Washington Mutual bank in September 2008 to boost earnings going forward. Likewise, JPM's relatively stronger balance sheet should enable it to snare a bigger market share. Yet another plus: The bank could grow international investment banking from its already number one position (roughly 14%-15% of global IB fees).

In specific dollars and cents, the analyst pegs JPM's per-share earnings at $3.02 this year, versus $2.58 last year, and $4.78 in 2011.

Graseck also takes note of several risks, namely the prospects of larger reserve hikes and higher credit losses than currently anticipated, as well as thinner net interest margins if rates fail to begin to rise in August as Morgan Stanley economists are currently forecasting.

She's not alone in her risk concerns. JPM's latest short interest -- a bet that its stock price will fall -- shows a short position of 25.7 million shares. Among the banking problems cited by one short seller are the prospects of substantially more writeoffs from bad loans, especially in commercial real estate, falling loan demand and the lack of lending. "Many investors," he says, "seem to believe bank stocks are now money in the bank, but I wouldn't bank on that because it's really not clear the ill effects of the recession are almost over."

Meredith Whitney, one of Wall Street's leading bank trackers, also has some worries, having recently said she thought bank stocks were vulnerable to a 10%-15% decline.

As far as JPMorgan Chase goes, Graseck is obviously in love to push a stock that has already risen from the basement to the penthouse. She may, of course, be right, I don't want to mess around with the affairs of the heart, it's worth keeping in mind that Wall Street's love affairs are notorious for their short lifespan and bitter endings.

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