JPM, GS: Upside continues to exist.

Two of our financial names, GS and JPM, have been stagnant a bit lately but I think these two companies are poised to deliver healthy earning surprise for the next earning period. As a result, I continue to see a healthy upside in the stock price.

GS is a pure play on this hot equity environment. Everyone thought that the bull run in the stock market is over in 06 and 07 will be a more challenging year; many economists predicted slowing economy that will limit GDP growth rate below 1 to 2 % level. Earning growth rate of GS has been perceived to flatten out and consequently, investors have been very stingy with awarding correct market multiple for GS. GS is now trading with PE of about 10. Because I think there is substantial EPS revision for 07 and 08, I believe that real PE of this company is less than 9. In my opinion, GS could deliver blow-out Q in June again. EPS estimate of GS for 07 could be as high as $25 to $26 level, outstanding 25% upside from what the current consensus number predicts. With stingy PE multiple, this stock is still worth $260. But if the market multiple expands as I anticipate, then GS could trade to the level near $300 a share. While the stock has been a bit stagnant, I think earning in June will be a great catalyst for this stock to win investor recognition. The equity market environment is simply too vibrant, far beyond what the market was expecting. Private equity is taking the companies out of the market left and right. The companies are buying back shares, reducing the overall float of the overall shares. Yet there are still plenty of cash sitting on the side line to push share price higher. GS's trading business is generating incredible return from hot commodity and emerging markets, which GS has a heavy exposure. Private equity side of GS has been on a roll as well. I expect continued strength in the market in 07 and GS still has plenty of fuel left to make additional advances. I really like the stock at a current level.

JPM also has been a bit stagnant. The bank sectors are still perceived negatively given the possible fallout from the sub-prime mortgage sector. While JPM is not without the exposure to this sector, it has a manageable sub-prime loan exposure. While other investors feel that bank¡¯s story of improving the overall operational efficiency is over, I believe that there are still room for the company to make further improvements especially in the retail side. Others feel that JPM will make a large acquisition and hence sees stock unattractive, given that JPM is trading with higher stock multiple compared to other banks such as C and BAC. I continue to believe that Jamie Dimon will make deals that are accreditive and he will focus more on generating higher return for investors. After all, high stock price is extremely attractive currency to use if he decides on future acquisitions to grow the bank to another level. Also roughly half of JPM revenue comes from Investment Banking and this sector has been tremendous for JPM. I see current EPS estimate is too low for the bank and sees bank making nearly $5 in 08. If yield spread between long and short term yield continues to steepen as it has been in recent times, there is also an upside in the retail business. Given this vibrant stock market, I don't see the economy heading into the recession. I also expect energy price to stabilize after this summer driving season, supporting consumer spending trend. I strongly feel that JPM has solid upside at least to $60 level. Recent Smith Barney upped the bank TP to $62 and I have seen some analyst TP bumped upto low $70 level. I think if you stay patient with this company, you will be richly rewarded.

The current stocks in that I cover are: Filthy Rich Tech ideas (comprised of Openwave, Avid Technology, Tivo, IBM, and Research in Motion), Filthy Rich Biotech ideas (comprised of Amgen, Celgene, Genzyme, Isis pharmaceuticals, Alnylam pharmaceutical, and Protein Design Lab), Filthy Rich Financial ideas (JP Morgan and Goldman Sachs), Filthy Rich China ideas (Focus Media Holding and Ctrip.com), Filthy Rich Transportation ideas ( American Airline and Southwest Airline), and Filthy Rich Specialty Retail ideas (Peet's coffee)

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