In this installment of Using The Value Line Report, we will be venturing a comparative analysis of two prominent and successful goliaths of the financial services arena: The Goldman Sachs Group, Inc. (GS - Free Goldman Stock Report) and JPMorgan Chase & Co. (JPM - Free JPMorgan Stock Report). Indeed, these are two of the most renowned investment banks in the industry today. In fact, it is arguable that these two companies were among the pillars upon which the modern banking sector was founded, with legacies dating back to the early 19th century. In this review, we will take a quick look at both companies’ respective business models and consider various criteria that make the equities appealing investment prospects, as well as the factors that may give investors cause for concern.
Notably, one should take into consideration that, while JPMorgan has been synonymous with investment banking for more than a century, following its merger with Chase Bank, consumer and commercial banking became roughly half of the company’s business. Meanwhile, although at the height of the most recent recession, Goldman agreed to “officially” become a bank holding company (some say as a means to gain access to TARP funds made available following the financial crisis in the mid-2000s, while others contend that the decision came at the behest of the Treasury Department), the company operates almost entirely as an investment banking firm. This explains why, although Goldman and JPMorgan’s operations are quite similar in many respects, the companies fall into separate industries: Goldman is in the Investment Banking Industry and JPMorgan is in the Bank Industry. A quick look at each company’s Blurb offers further insight into each outfit’s specific operations and the markets they cater to. Moreover, the respective pages are quite different, as Goldman’s page is tailored for a securities investment-focused business model, while JPMorgan’s page is tailored for a consumer/corporate/commercial banking business model. This is clearly apparent in the Statistical Array, where the historical financial data and forward-looking estimates are located.
Those differences aside, we will assume that investors want to take the most direct approach to determining these stocks’ potential for capital gains, both over the near-term and long-term horizons. With this in mind, depending on whether or not an investor is looking for a year-ahead play or a buy-and-hold opportunity, there are specific metrics on the page that offer the best insight into a stock’s compatibility with either investment strategy.
First, we will look at the short-term or year-ahead price performance potential of both equities, which is determined by the Timeliness Ranking System and displayed in the Ranks box at the top left-hand corner of the page. A look at these numbers reveals that GS is ranked a 2 (Above Average), versus JPM’s rank of 3 (Average). This suggests that GS shares are expected to outpace the broader market averages over the next six to 12 months, while JPM stock is expected to merely mirror or perform in line with those averages over the same span. Therefore, short-term accounts would likely be more inclined to consider GS at first glance. Still, it is undeniable that recent equity-price actions suggest these companies have both responded favorably to the outcome of the most recent Presidential election. Indeed, it would appear that the broader market is of the opinion that a Trump Presidency is likely to be a boon for financial services businesses. Furthermore, the recent Federal Reserve short-term interest rate hike likely fueled further price gains. These stock-price advances were not displayed in our most recent October (GS) and November (JPM) reports because the lion’s share of the appreciation for both of these stocks began after both the GS and JPM reviews went to press. Nonetheless, GS and JPM are up some 38% and 26%, respectively, since the election. These are the types of near-term spikes year-ahead accounts swoon over, but the harder decision is determining the appropriate time to take profits versus riding out the long haul.
As for the long-term view, a more patient investor seeking to buy and hold either of these securities would be better served by focusing on the 3- to 5-year Projections box located just below the Ranks box. In this section of the page, investors can see the expected Target Price Range of a stock over the next 3 to 5 years, as well as the expected percentage gain from the current price and the total return potential, which includes any income or dividend distributions over that span. Analysis of this data for each of these investment banks reveals that the aforementioned price strength may well have eroded much of the respective companies’ total return potential out to 2019-2021. While we are not at liberty to divulge analysts’ Adam Platt’s (GS) and Theresa Brophy’s (JPM) potential adjustments to the long-term projections of these companies prior to their next reports (due to be released in early January and February, respectively), it is a reasonable conclusion that these equities have been fueled by more speculative factors of late, and recent quotations already reflect much of the revenue and earnings growth we envision out to late decade.
Lastly, when considering financial condition, it seems that Goldman has a slight edge over JPMorgan. Although both boast high marks for Financial Strength, GS has an A++ rating, which is just a tad higher than JPM’s A. Moreover, Goldman’s Safety rank is a 2 (Above Average), versus JPM’s 3 (Average). Thus, all things being equal, it seems that GS is a moderately more appealing investment choice on a risk-adjusted basis. However, it is worthy of note that, for those seeking income, JPM’s dividend yield is more attractive than that of GS.
All told, while there are several factors that contribute to investment decisions, the Value Line page offers a wealth of insightful information that can effectively guide an investor toward his/her ideal objective.