JPMorgan Chase & Co. (JPM) made headlines last week when the company agreed to purchase the operations of Washington Mutual.  However, there was a bit less attention paid to the fact that the company issued an additional $10 billion dollars worth of stock in order to finance the transaction.  Shares were offered to the public last Friday on a first-come-first-serve basis and priced at $40.50.  This pricing was at a steep discount to the previous close of $43.46 and may have frustrated current shareholders who saw their ownership somewhat diluted in the deal.Any frustration should have been quickly erased, however, as the stock spent the rest of the day moving sharply higher to close at $48.24 or 19% above the deal price!  This kind of trading indicates strong demand for the stock despite the general weakness in financial names.  Looking a bit deeper into the situation it is easy to understand why investors are getting excited about owning this name.

JP Morgan is one of the few big ($165 Billion market cap big) names in the financial sector that has managed to escape most of the carnage.  We are currently operating in a “survival of the fitest” envirionment which allows the few strong players to reap the spoils from over-leveraged competitors.  As the company picks up assets at fire-sale prices and integrates them into a well-functioning corporation, the purchases are quickly translating into accretive gains for investors.  This drives the share price higher and should continue to add to the company’s strong standing for years to come.

Back in March JP Morgan was able to pick up Bear Stearns for just a bit more than the value of Besr’s New York headquarters.  As the financial mess surrounding mortgage securities works its way through the system, JP Morgan will eventually be able to capitalize on the strong distribution network of brokers represented by Bear.  This strategic investment was made at a very attractive price.  Similarly, last week’s acquisition of WaMu took place on attractive terms and while there will certainly be plenty of issues to sort through, the bottom line is that shareholders stand to profit handsomly from the transaction.

Typically Zachstocks does not cover large cap names with long operating histories, but with the recent stock offering fitting within our area of expertise, it seemed appropriate to bring this name forward.  Similarly Capital One Financial Corp. (COF) brought a recent offering to market at $49.  The stock is currently near $51 for a nice initial profit.  The stock appears to be the “best of breed” in the credit card and consumer lending group which has faced so many difficult issues.  If things begin to turn around, you can expect both JPM and COF to experience significant gains in the coming months.

FD: Author has a long position in JPM and COF

Additional Reading:

Kim Peterson on the irony of JPM / WaMu deal

Todd Harrison on the effect of bailouts