Options Trades
JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and
Goldman Sachs Group Inc (NYSE:GS) Calls
Monday, January 13, 2014

Banks Are Climbing For Profits!

**OPTIONS TRADE 1: Buy the JPM Apr 2014 60.000 call (JPM140419C00060000) at or under $1.65, good for the day. Place a protective stop limit at $-.65 and a pre-determined sell at $2.65.

**OPTIONS TRADE 2: Buy the GS Apr 2014 180.000 call (GS140419C00180000) at or under $6.45, good for the day. Place a protective stop limit at $2.60 and a pre-determined sell at $10.50.

**OPTIONS TRADE 3: Buy the C Apr 2014 55.000 call (C140419C00055000) at or under $2.45, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $4.00.

by Ian Harvey

January 13, 2014

Introduction

Wells Fargo and JPMorgan Chase & Co. will kick off fourth-quarter bank earnings season on Tuesday with other big banks like Bank of America Corp., Goldman Sachs and Citigroup Inc. following later in the week.

The S&P 500 (INDEX: SPX) is seen growing earnings per share by 5.7 percent in the fourth quarter of 2013 compared to the year-ago period, on par with the growth seen in the third quarter, according to S&P Capital IQ.

Eight sectors are expected to report year-over-year increases led by Financials, Industrials and Telecom Services, with Energy and Utilities recording the only declines.

Bank stocks had a stellar return in 2013, generally outperforming even the 26.5% return on the Dow Jones Industrial Average and the 29.6% gain in the S&P 500 index.

Merrill Lynch has now reported that banks can keep outperforming the broad market in 2014 and have given 10 reasons why they believe that this is possible:-

1. Better macro + mid-cycle = good for stocks.

2. Multiple expansion may not be over. Mega cap multiple expansion has lagged the most. Abating uncertainty over regulatory and litigation concerns should help.

3. A steepening yield curve will help stocks — now is not too early to own bank stocks.

4. Declining risk will help multiples (price to tangible book value).

5. Stable earnings revision trends heading into 2014 — solid GDP could drive EPS upside from loan growth and capital markets.

6. Stocks outperform when credit is stable. Abating balance sheet risk and unlikelihood of negative credit surprises.

7. U.S. active managers are still underweight — 8% underweight implies incremental buyers on the sidelines.

8. Capital return will accelerate at CCAR banks. Expect capital payout for large-caps to rise to 62% of earnings per share from 42% in 2014.

9. There is always a premium for “niche” growth. Small-cap portfolio managers should not be scared of high price-to-earnings (P/E) ratios due to growth opportunities.

10. The M&A logjam in smaller-cap banks could finally break.

Merrill Lynch went as far as to say that it sees its top picks in bank stocks nearly doubling the returns of the S&P 500 in 2014. Those picks included Citigroup Inc. (NYSE: C) and J.P. Morgan Chase & Co. (NYSE: JPM).

They also raised the targets as follows:

• Citigroup target raised to $65 from $61 (versus a $54.81 close)

• J.P. Morgan target maintained at $65 (versus a $58.87 close)

Therefore, following on from this here are three options recommendations on JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc (NYSE: C) and Goldman Sachs Group Inc (NYSE: GS).

JPMorgan Chase & Co. (NYSE: JPM)

**OPTIONS TRADE 1: Buy the JPM Apr 2014 60.000 call (JPM140419C00060000) at or under $1.65, good for the day. Place a protective stop limit at $-.65 and a pre-determined sell at $2.65.

Introduction

JP Morgan will report its fourth quarter results before the market opens on January 14. Headed into the company's quarterly report, analysts have forecast earnings of $1.35 per share, slightly under the $1.39 it reported during the same period last year. The stock has been a steady performer as of late, with shares rising 13.9% since the end of June.

Technical Outlook

Shares of JP Morgan closed Friday trading at $58.49, up 0.46%. JP Morgan has a 52 week low of $45.35 and a 52 week high of $59.47. The stock’s 50-day moving average is $56.21 and its 200-day moving average is $53.25.

Technical indicators for JPM are bullish and the stock is in a strong upward trend. The stock has support above $55.40 and resistance below $59.47.

The company has a market cap of $220.6 billion and a P/E ratio of 13.14.

Earnings

The investment bank is expected to report fiscal fourth-quarter earnings of $1.35 per share on revenue of $23.81 billion, according to analysts. JPMorgan posted a profit of $1.39 per share on revenue of $24.38 billion a year earlier.

Federal prosecutors on Tuesday announced a $1.7 billion settlement with JPMorgan, which was hit with two felony violations of the Bank Secrecy Act in connection with the firm’s relationship with Bernard L. Madoff Investment Securities. The case involved allegations JPMorgan ignored warning signs of Bernard Madoff's infamous Ponzi scheme. JPMorgan’s settlement with the Department of Justice is the largest bank forfeiture in history to resolve anti-money laundering violations.

Overall, everything that they’re doing and other banks as well is positive both in the short term and long term -- they’re clearing all of the guck, for a lack of a better word, from the financial aid crisis -- when they emerge on the other side of that, they’re going to emerge much leaner and much stronger than they were before.

Analysts Opinions

Equities research analysts at Barclays hoisted their target price on shares of JPMorgan Chase & Co. from $65.00 to $67.00 in a research note issued to investors last Monday. The firm currently has an “overweight” rating on the stock. Barclays’ target price would suggest a potential upside of 14.88% from the stock’s previous close.

Also, JP Morgan has been the subject of a number of other recent research reports:-

• Analysts at TheStreet reiterated a “buy” rating on shares of JPMorgan Chase & Co. in a research note to investors on Friday, January 3rd.

• Separately, analysts at Citigroup Inc. reiterated a “buy” rating on shares of JPMorgan Chase & Co. in a research note to investors on Thursday, January 2nd.

Seven research analysts have rated the stock with a hold rating, twenty-five have given a buy rating and two have assigned a strong buy rating to the stock.

JPMorgan Chase & Co. presently has an average rating of “Buy” and a consensus price target of $60.57.

Conclusion

It is going to be a big week of earnings reports from the financial sector so all eyes will be on JP Morgan when it reports. The company will set the tone for the rest of the sector, so it will be closely watched. JPM seems to always be getting negative press, including a recent $2 billion settlement on allegations that the company ignored signs of suspicious activity well in advance of the Bernie Madoff scheme being uncovered. Over the last year alone, JP Morgan has paid out over $23 billion in legal settlements, but analysts remain very bullish on the stock.

Over the same time, JPM has posted better than expected earnings numbers each quarter, and there is little reason to believe it will not do the same again this quarter. One thing to watch is the mortgage business. Concerns linger over the impact of higher interest rates on the housing market, so we could see some mortgage related weakness, but it is not believed that it will be enough to hurt the company, or the stock. Expect a strong report, with shares trading higher following the news.

Goldman Sachs Group Inc (NYSE: GS)

**OPTIONS TRADE 2: Buy the GS Apr 2014 180.000 call (GS140419C00180000) at or under $6.45, good for the day. Place a protective stop limit at $2.60 and a pre-determined sell at $10.50.

Introduction

Investment bank Goldman Sachs is expected to post revenue of 7.58 billion and EPS of $4.20 on Thursday. Goldman’s performance is regarded as a good measure of investment banking performance.

Analysts are split on Goldman with price targets ranging from $155 to $200.

Guggenheim, who is bullish on Goldman with a $200 price target stated in an early December note, “Until short-term interest rates are expected to rise soon or regulators loosen their grip on excess capital, we believe investors should begin to be more selectively focused on banks with the potential for earnings momentum and a relative discount in valuation.”

Technical Outlook

Shares of Goldman Sachs closed Friday trading at $178.39, up 0.56%. Goldman Sachs has a 52 week low of $135.12 and a 52 week high of $181.13. The stock’s 50-day moving average is $169.47and its 200-day moving average is $160.07.

The company has a market cap of $81.815 billion and a price-to-earnings ratio of 10.81.

Earnings

Priced at 11.85x this year’s forecasted earnings, GS shares are relatively inexpensive compared to the industry’s 20.01x forward p/e ratio.

And for income investors, the company pays shareholders $2.20 per share annually in dividends, yielding 1.20%.

Consensus earnings for the current quarter by the 24 sell-side analysts covering the stock is an estimate of $4.11 per share, which would be $1.49 worse than the year-ago quarter and a $0.47 sequential decrease. Furthermore, analysis shows the full-year EPS estimate to be $15.04, which would be a $0.91 improvement when compared to the last year’s annual results.

The quarterly earnings estimate is predicated on a consensus revenue forecast of $7.62 Billion. If reported, that would be a 17.53% decrease over the year-ago quarter.

Analysts Opinions

Equities research analysts at Nomura began coverage on shares of Goldman Sachs Group in a research note issued to investors last Thursday. The firm set a “neutral” rating and a $172.00 price target on the stock. Nomura’s price target indicates a potential downside of 3.61% from the stock’s previous close.

• Analysts at Societe Generale initiated coverage on shares of Goldman Sachs Group in a research note to investors on Tuesday. They set a “sell” rating on the stock.

• Separately, analysts at Susquehanna set a $206.00 price target on shares of Goldman Sachs Group in a research note to investors on Monday.

• Finally, analysts at Citigroup Inc. reiterated a “neutral” rating on shares of Goldman Sachs Group in a research note to investors on Thursday, January 2nd.

One equities research analyst has rated the stock with a sell rating, eighteen have issued a hold rating and five have assigned a buy rating to the company.

The company presently has an average rating of “Hold” and an average target price of $166.30.

Conclusion

The bank reported a return on equity of 10.4 percent in the first nine months of last year, after earning 10.7 percent in 2012 and 3.7 percent in 2011. That compares with 8 percent for JPMorgan Chase & Co. (JPM) in the first three quarters of 2013, 7.8 percent for Citigroup Inc. (C) and 6 percent for Morgan Stanley.

Goldman Sachs’s superior returns helped drive its shares to the highest premium over book value of the five largest Wall Street banks.

The full-year return on equity probably will be 10.4 percent, according to the average of estimates by 15 analysts surveyed by Bloomberg.

Citigroup Inc (NYSE: C)

**OPTIONS TRADE 3: Buy the C Apr 2014 55.000 call (C140419C00055000) at or under $2.45, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $4.00.

Introduction

Citigroup, a global diversified financial-services holding company, is also expected to report on Thursday. Analysts are expecting EPS of $1.08 on revenue of 18.54 billion.

Almost all analysts are bullish on Citigroup, largely because of current multiples. Bank of America, who calls it a top pick, expects shares to reach $65: they said,

“C fits well with the themes for 2014 outperformance laid out by BofAML’s Equity Strategy team, which include: self-help recovery story, global exposure, GDP sensitivity, and high (but declining) beta. In our view, at this stage of US economic recovery, investors should own the US-based, globally exposed (C derives almost 2x more of its revenues internationally than the S&P average) bank stock trading below tangible book that has plenty of capital and is also a ‘self-help’ story.”

Technical Outlook

Shares of Citigroup closed Friday trading at $54.72, down 0.87%. Citigroup has a 52 week low of $40.28 and a 52 week high of $55.28. The stock’s 50-day moving average is $52.52 and its 200-day moving average is $49.48.

The company has a market cap of $166.4 billion and a price-to-earnings ratio of 13.83.

Earnings

Citigroup last posted its quarterly earnings results on Tuesday, October 15th. The company reported $1.02 earnings per share for the quarter, missing the analysts’ consensus estimate of $1.11 by $0.09. The company had revenue of $18.20 million for the quarter, compared to the consensus estimate of $18.73 billion.

During the same quarter last year, the company posted $1.06 earnings per share. Citigroup’s revenue was down 7.8% compared to the same quarter last year. On average, analysts predict that Citigroup will post $4.62 earnings per share for the current fiscal year.

Analysts Opinions

Research analysts at Nomura began coverage on shares of Citigroup in a report released last Thursday. The firm set a “buy” rating and a $70.00 price target on the stock. Nomura’s price target would suggest a potential upside of 27.71% from the stock’s previous close.

The analysts wrote, “We also see significant excess capital generation / best-in-class payout potential as the drag from Holdings moderates and DTA utilization accelerates.”

Also, Citigroup has been the subject of a number of other recent research reports:-

• Analysts at Jefferies Group initiated coverage on shares of Citigroup in a research note to investors on Wednesday. They set a “hold” rating and a $60.00 price target on the stock.

• Separately, analysts at Zacks downgraded shares of Citigroup from an “outperform” rating to a “neutral” rating in a research note to investors on Tuesday. They now have a $86.50 price target on the stock.

• Finally, analysts at Evercore Partners upgraded shares of Citigroup from an “equal weight” rating to an “overweight” rating in a research note to investors on Monday, December 16th. They now have a $58.00 price target on the stock.

One equities research analyst has rated the stock with a sell rating, seven have issued a hold rating, twenty-one have given a buy rating and one has issued a strong buy rating to the company.

The company has a consensus rating of “Buy” and a consensus price target of $62.00.

Conclusion

Technically, the banking giant has climbed 31% during the past year to trade at $55.28. On the fundamental front, Citigroup is on tap to report fourth-quarter earnings before the market opens on Thursday, Jan. 16 -- the day before the aforementioned front-month calls expire. The firm has topped consensus bottom-line estimates in five the past eight quarters.



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