Long-Short Strategies: Wells Fargo & JPMorgan

Looking for a long-short trade to put on to get some uncorellated returns and limit your market exposure? Here is the rationale.

Wells Fargo (WFC) is by far the strongest major US bank. It sells more products to each of its customers than other banks and has grown organically as well as through acquisitions. More importantly, it just acquired Wachovia which operates in markets Wells is already familiar with (unlike JP Morgan's purchase of Wamu). Wells has suffered no 11 figure write-downs like many of its peers.

JP Morgan (JPM) is also a strong US bank. However, JPMorgan will conceivably face more problems integrating Wamu than Wachovia, particularly with respect to California where JPMorgan has almost no experience. JPMorgan will remain a leader, but may find Wells Fargo is new leader.

Here is the real reason for the trade:
WFC Price (11.13 11.20am EST): 27.28
JPM Price (11.13 11:20 am EST: 35.04

Wells Fargo Market Cap: approx $91.5b (11/13)
JPMorgan Market Cap: approx $130b (11/13)

Wells P/E = 13.5
JP Morgan P/E= 16.1

Wells yield = 4.7%
JP Morgan yield =4.2%

Which one of these stocks is cheaper?
I think Wells is the better bank, but even if you believe they are even, JPMorgan looks to be about 10-15% overvalued relative to Wells. I don't know what the financial sector will do the next few months, but I'd put maybe 5% of a portfolio in this mostly market-neutral trade that could pay off 10 % or more in the next couple months. Will check back in a bit to see how this trade does.


Update: Since recommending the trade WFC is down to $20.91 from $27.28, JPM is down to $20.33 from $35.04. Wells the long part of our trade is down 23%, but JPM, the short portion of the trade is down 42.1% for a 19% gain on our market neutral financial trade.