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Why Warren Buffett Loves JPMorgan Chase Stock

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JPMorgan’s tangible book value at the end of the third quarter of 2019 was $60 a share, implying that it could trade to $180 based on Buffett’s math. Photograph by Alex Wong/Getty Images

Warren Buffett got it right on JPMorgan Chase when he marveled at the bank’s high returns in 2019 and said that its shares ought to trade at a higher valuation as a result. Too bad he didn’t buy more of them.

Buffett suggested that JPMorgan Chase (ticker: JPM) ought to trade for three times tangible book value, which at the time of his comments would have implied a price of about $168, against a market price then of about $105.

Unfortunately for Berkshire Hathaway777彩票地址 (BRKA) shareholders, CEO Buffett didn’t follow through on his recommendation and has added little to Berkshire’s sizable holdings of the country’s top bank in 2019. Berkshire held 59.5 million shares at the end of the third quarter—some 2% of the bank’s shares outstanding—a stake now worth over $8 billion. Berkshire owned 50.7 million shares at year-end 2018, with nearly all of it purchased in the second half of 2018.

JPMorgan has been on a roll over the past year. It shares rose $1.69 to $141.09 Thursday—a record high. In 2019, the stock gained 42.8%, the third-best showing among the country’s top 40 banks, behind only Citigroup (C) and Bank of America (BAC), according to Wells Fargo777彩票地址 banking analyst Mike Mayo.

after the release of Berkshire’s annual shareholder letter, Buffett said he had been “dumb about not buying” JPMorgan earlier, given the bank’s returns and his longtime admiration for its CEO, Jamie Dimon. Buffett noted that JPMorgan was earning 15% to 17% on tangible equity.

Read more: ‘Goliath Is Winning.’ JPMorgan Chase Stock Is a Solid Bet Under Jamie Dimon

777彩票地址His sophisticated analysis is trademark Buffett: “A business that earns 15% or 16% or 17% on net tangible equity, that’s incredible in a world of 3% bonds. I mean, just imagine that you had a deposit account with JPMorgan that they made a mistake and they gave you 15% on it. And they couldn’t redeem it. What would you sell that account for? You wouldn’t sell it for 100 cents on the dollar. You wouldn’t sell it for 200 cents on the dollar. You wouldn’t even sell it for 300 cents on the dollar,” he said, of the CNBC interview.

“You have an FDIC-guaranteed instrument that would now be at 300 cents on the dollar. If it was 15% on equity, you’d be earning 5% on it, which is way better than Treasuries. Now, if on top of that, your deposit allows you to let your interest compound to some extent, now, that instrument becomes even worth way more. Because if you have an instrument that could compound at 15% for 10 years and use the added capital, that’s worth way more than three times tangible equity at current interest rates, way more.” The banks’ return on tangible equity was 19% during the first three quarters of 2019.

JPMorgan’s tangible book value at the end of the third quarter of 2019 was $60 a share, implying that it could trade to $180 based on Buffett’s math. At its current price, the stock trades for nearly 14 times projected 2019 earnings and yields 2.6%.

Write to Andrew Bary at andrew.bary@barrons.com

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