Best Bet: Facebook or JPM?

Which is the better stock to own: Facebook or JP Morgan Chase? Both are controversial now. Facebook’s public offering was a bust. JPM lost a ton on trading. For the long term, JPM seems the better bet.
Facebook (FB) and JP Morgan Chase (JPM) are large-capitalization companies that have taken their lumps. Facebook faces a moment of truth on Thursday when it reports second-quarter earnings, amid speculation that its revenue growth is slowing. JPM, the largest U.S. bank by assets, recently released quarterly earnings down 8.7% from the year before, in part due to $5.8 billion in losses from the “London Whale” trading mess.
Facebook’s initial public offering (IPO) was priced at $38 per share, and the stock since fell to $29, down 24%. Nevertheless, it still has a large market valuation, $61 billion. Perhaps the IPO was over-priced, but the social networking company is a market colossus.
JPM’s trading debacle tarnished its image, but more importantly sparked renewed cries for increased regulation on banks and bank trading. JPM saw its stock price tumble 22% since it announced the trading loss on May 10.
The two companies make an interesting contrast. Let’s compare them.
To start, consider both companies’ competitive environment. JPM offers a commodity: money. It is tough to differentiate yourself, and price becomes a very big factor for JPM. Facebook has a natural monopoly, as its network compels others to use its service.
But the analysis of common stocks goes beyond competitive market environments. What do we buy when we buy a common stock? We buy the future. A common stock’s value is only related to the past insofar as the past provides us insights into a company’s future earning ability.
As I noted in my new book, The Large-Cap Portfolio, the current and future competitive environment is extraordinarily important. We would all like to own a company that has monopolistic pricing power when it is just beginning. After all of the monopolistic characteristics of a business are already priced into the shares, the large-cap company’s market value becomes much less sound. Competition and substitute products chip away at the advantage of monopolistic firms, eroding their profitability and setting up investors for disappointment.
Think of two drug companies. One is a small-cap company that will announce tomorrow that it has patented a promising new drug. Assuming it gets federal approval and broad marketplace acceptance, then the company’s share price has significant potential, if purchased today.
In contrast, consider the large-cap drug company with an existing patented cholesterol-lowering drug on the market. The value of this drug is already reflected in the company’s share price. There is also risk. What could go wrong? One, new cholesterol-fighting drugs could come to market as substitutes. Or some other, effective non-drug method of controlling cholesterol could appear.
Many large-cap companies’ share prices already reflect the promise of a very appealing market environment.
Facebook trades at 71 times its trailing earnings, 15 times sales and almost 10 times book value.
JPM is already mired in a very competitive, almost commodity-like, market climate. It’s doubtful that the company can grow at a brisk rate. However, it’s also doubtful that competitors will be successful chipping away at JPM’s business.
JPM trades at 8 times earnings and only 70% of book value. While JPM doesn’t have the competitive environment that Facebook enjoys, it also has little to lose in competitive advantage, and a low relative stock price as well.
Is JPM’s relatively low forward growth expectation—implied by the company’s current valuation—a more likely outcome than Facebook’s? The high expectations baked into Facebook’s high price multiples are simply too speculative. The difficulty inherent in maintaining high-margin, high-growth businesses over long periods is large. JPM’s principle business is less susceptible to economic forces that would drive margins and fees lower.
Several weeks ago, I watched a TV interview of Warren Buffett, who, as usual, offered pithy bits of wisdom for investors. Buffett noted that he doesn’t “buy stocks or businesses based on the outlook for the next three months or six months.”
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Thomas Villalta, CFA, is president and chief investment officer at Jones Villalta Asset Management LLC in Austin, Texas. His blog is
The firm and its clients have no Facebook holdings but do own JP Morgan Chase stock.

The articles written by Thomas Villalta represent his personal opinions and viewpoints, not those of Jones Villalta Asset Management, LLC (a Registered Investment Adviser with the Securities and Exchange Commission), and its advisory services. The information contained in this website is for illustrative and educational purposes only and may not represent the only information Thomas Villalta uses in making investment predictions. Any mention of a particular security or related performance or sector or portfolio of securities is not intended to represent a recommendation to sell or buy that security, sector or portfolio of securities. Investments in securities involve the risk of loss including the entire principal. Past performance is no guarantee of future results. Nothing in this site constitutes investment advice, performance data or any recommendation that a particular security, portfolio of securities, transaction or investment strategy is suitable to any specific person. All opinions are subject to change without notice and are as of the date of each entry.

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