Value and income oriented baskets defensive

JPMorgan Chase & Co. (NYSE:JPM)’s second half of 2014 outlook report focuses on baskets built for various investment strategies. A hypothetical 3 year back test shows that both the value and income oriented baskets would have underperformed the S&P 500 (INDEXSP:.INX) over the past 3 years. The test’s results may suggest that both of these baskets may perform better in the second half of 2014, according to JPMorgan’s equity derivatives strategy team.

Healthcare and consumer discretionary highlighted in value basket

The value basket contains 38 names that are close to being equally weighted. The basket is well diversified among sectors, with healthcare, consumer discretionary, industrials and technology having the largest weights. Large cap stocks dominate the basket, with 66% of stocks with a market cap above $10 billion.

One value pick that is also considered among JPMorgan Chase & Co. (NYSE:JPM)’s top picks is Honeywell International Inc. (NYSE:HON). The analyst team led by Nicholas Rosato, Jr., director of North America equity research, believes Honeywell’s balance sheet is strong. The firm has high margins, cost discipline, and diversified revenue streams. JPMorgan analysts see the firm as undervalued, and have a price target of $104 per share.

Another top and value basket pick is General Motors Company (NYSE:GM). JPMorgan Chase & Co. (NYSE:JPM) regards the stock as a “compelling value opportunity” with a price target of $50 per share. General Motors shares are trading at a discount to its long term historical trading range and are inexpensive relative to competitors such as Ford Motor Company (NYSE:F). Shares of GM have underperformed in light of high profile vehicle recalls. The uncertainty surrounding recalls’ costs will likely subside as General Motors is completing victim compensation plans and exhaustive product reviews to find issues. General Motors will likely provide more certainty on recalls’ costs in its second quarter report, in JPMorgan’s view. Releases of profitable SUVs and pickup trucks may drive revenues higher making the stock more appealing.

JPMorgan

Source: JPMorgan equity derivatives strategy, Bloomberg

JPMorgan sector composition

Source: JPMorgan equity derivatives strategy, Bloomberg

JPMorgan value basket

JPMorgan’s income basket is more concentrated

The income basket contains 16 names and JPMorgan seeks to keep equal stock weights. The basket is invested across several sectors. Financials, materials and consumer discretionary comprise 60% of the sector weights, dominating the basket. Similar to the value basket, large caps are predominant with 70% of names with a market cap above $10 billion.

Wells Fargo & Co (NYSE:WFC) is JPMorgan Chase & Co. (NYSE:JPM)’s top income pick and it is part of the overall top pick list. Wells Fargo’s dividend yield is 3% versus 2% for its competitors. JP Morgan analysts expect further increases in Wells Fargo’s dividend yield driven by earnings growth, strong balance sheet and more revenues in investment banking, credit cards and wealth management. JPMorgan’s price target for Wells Fargo is $54.50 per share.

JPMorgan market cap

Source: JPMorgan equity derivatives strategy, Bloomberg

JPMorgan income ideas

Source: JPMorgan equity derivatives strategy, Bloomberg