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Going Cheap at J.P. Morgan Chase

Investors who foresee a turnaround next year are beefing up their portfolios with recovery-play stocks. For John Maloney, the top pick is J.P. Morgan Chase (JPM), with total assets of $715.8 billion and a market cap of $78.7 billion. Formed by the merger approved early this year of Chase Manhattan and J.P. Morgan, the combined company is a "solid value play on the recovery of the economy and the capital markets," says Maloney, president of M&R Capital Management. He points out that Morgan Chase's prospects are much tied up with investment banking, which accounts for 50% of revenues and 70% of operating earnings. As such, exposure to credit risks on loans has been reduced, he says, with J.P. Morgan Chase using its credit relationship with clients as a lead-in to investment banking deals.

J.P. Morgan Chase, at 39, trades at a discount: That's just 11 times Maloney's 2002 earnings estimate of $3.25 a share, vs. 15 times for its peers. Maloney thinks J.P. Morgan Chase also deserves a price-earnings ratio of 15--implying a price of 49 or 50. If the recovery is robust, J.P. Morgan Chase could earn $3.30 a share or more, he adds. For 2001, he sees earnings of $2. Diane Glossman of UBS Warburg (UBS), who rates the stock a buy, agrees that, at 12 times her 2002 estimate of $3.30, the stock is at a considerable discount. By Gene G. Marcial

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