This ‘Hated’ $6 Billion Cash Machine Is Selling For Cheap

This scandal follows the “London Whale” losses sustained in 2012, when JPMorgan’s Chief Investment Office lost $2 billion on a series of transactions involving credit default swaps. The chief officer responsible for the mess has since stepped down.

So what are we to make of JPMorgan’s management?

On one hand, JPMorgan’s management team has doubled book value since 2007 and tripled revenue since 2003.

On the other hand, some members of management have made terrible decisions, resulting in billions of dollars in losses due to bad derivatives trades and government fines.

The problem may stem from its size. The company manages more than $2 trillion worth of assets in dozens of countries. Economics of scale help JPMorgan compete by offering rates and services that smaller banks simply can’t compete with.

But this same size makes the company much more difficult to manage, and the resulting headaches caused by far-flung managers making bad decisions could continue to plague the company.

Still, the current negative sentiment and bad press has resulted in the company’s stock selling for cheap. For the investor who is willing to stomach the risks, buying shares of a financial juggernaut like JPMorgan at a price even to book value may be too good to pass up.

Risks to Consider: The banking industry is subject to significant regulatory and macroeconomic risk. While JPMorgan is more conservatively governed than some of its peers, the financial crisis of 2008 proved that even institutions of its size are subject to dramatic shortfalls when the U.S. economy stagnates or dips into recession.

Action to Take –> For contrarian investors looking for a bargain, JPM rates a buy at today’s prices. Once the current litigation is resolved, the company should continue to do what it does best — generating enormous free cash flow at impressive margins.

P.S. Stocks like JPM are similar to a special group of securities we call “Forever” stocks. These are world-dominating companies that are solid enough to buy, forget about and hold — forever. To learn more about these stocks — including some of their names and ticker symbols — click here.