JPMorgan’s contingent interest autocallables linked to Schlumberger stock offer value, hedge

By Emma Trincal

New York, Dec. 13 – JPMorgan Chase Financial Co. LLC’s autocallable contingent interest notes due March 22, 2021 linked to the common stock of Schlumberger NV (Schlumberger Ltd.) offer a short-term potential gain as well as a hedge on a long position, said Steven Jon Kaplan, founder and portfolio manager of TrueContrarian Investments.

Each quarter, the notes will pay a contingent coupon if the stock closes at or above the trigger value, 70% of its initial share price, on the review date for that quarter. The contingent interest rate is expected to be at least 12.25% per year and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically called at par if Schlumberger stock closes at or above its initial share price on any review date other than the first and final review dates.

If the notes have not been called, the payout at maturity will be par unless Schlumberger stock finishes below the trigger value, in which case investors will lose 1% for every 1% that Schlumberger stock finishes below its initial share price.

Call likely

“There’s already been some sort of a rebound, so the stock is up, but it still offers good value because it was down so much,” said this portfolio manager, who focuses on value investing.

“You have more chances of getting called than not.

“This note can be the way to benefit from the rebound.”

Recovery

The share price is now up about 4.8% for the year to date but flat over the last 12 months due to choppy price action. In 2018, the stock plummeted and lost 47% of its value.

“The stock has already rebounded a lot, but it was down so much, there’s really room for more upside.”

In just the past month, the share price has gained over 10%, strongly outperforming the energy sector, which returned about 2%, as measured by the Energy Select Sector SPDR fund.

Negative sentiment

The robust recovery of a totally out-of-favor stock, one whose performance until recently was one of the worst in the S&P 500 index, exemplifies the benefit of having a contrarian mindset, he said.

“The stock was terribly unloved because it kept on going down for extended periods of time last year. When these things happen to a stock, people believe it’s hopeless. It’s a normal psychological pattern. If a stock drops sharply but rebounds, people are more forgiving. But when it goes down slowly for a while, that’s when investors turn really unhappy,” he said.

FOMO

The downtrend continued this year with the stock down 35% from April to October.

“This made the pain even worst because this year, unlike last year, was very bullish for the market in general.

“When you’re long S&P or Nasdaq, funds that keep on setting new highs, and you own something like Schlumberger that keeps on dropping, it’s even worse.

“You get caught in this fear of missing out. You get even more disenchanted and you sell, just at the wrong time.”

Short-term bet

Kaplan said he believed the notes will be called at the first opportunity, which is in six months. If this happens, investors may expect half of the annual coupon, or 6.125%.

“It seems like a modest return now because the stock is up. But it’s a relatively sound strategy if you want to maximize your chances of getting a positive return over a short period of time,” he said.

“It’s different if you’re actually buying the shares of Schlumberger. The upside potential is much, much higher of course.”

Hedging play

But timing when to buy a stock is not always easy.

“Let’s say you decided one year ago to buy this note. The stock dropped a lot in 2018, but you still would have done better with the note.

“Every so often, strange things happen and a stock can continue to decline for an extended period of time.”

For shareholders, the note could have served a purpose.

“If you haven’t bought a hedge for your long position, the note can act as some sort of a hedge in itself,” he said.

The 30% contingent protection at current price levels seemed reasonable, he said.

“Of course, it’s always better to have the highest possible amount of protection.

“But the fact that you can be called as soon as six months from now works to your advantage.”

Spring and taxes

The timing over the next six months happens to be beneficial for investors.

“Energy shares tend to rally starting in the winter through the middle of the year,” he said.

“It’s a well-established seasonal pattern, which is probably psychological. In the wintertime as reports of cold weather come out, energy prices tend to go up and they go up into the spring.”

Another positive factor for the upcoming trade is the current tax-harvesting season. In order to reduce taxes on their capital gains for the upcoming year, investors in the last quarter of the year look for stocks to sell at a loss.

“Tax loss selling create an artificial decline. We may see more of that. The stock has been trending up, but the notes haven’t priced yet.”

The trade date is Tuesday.

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The Cusip number is 48132HFY3.

© 2015 Prospect News.
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