Pass on JPMorgan (NYSE: JPM) Stock and Buy This Big Bank Play Instead

NYSE: JPM

NYSE: JPMJPMorgan Chase & Co. (NYSE: JPM) stock seemingly continues to establish all-time highs with each new trading session.

Yesterday (Tuesday) it closed at $69.75.

JPM stock has been on an uninterrupted march since the aftermath of the London Whale incident in 2012. That was when a JPMorgan trader made a big gamble on the credit markets and lost $6.2 billion for the firm. JPM stock dove 30% that summer - and then reversed course.

Today JPMorgan has a lot going for it.

It's one of the largest investment banks in the world, sitting on $2.6 trillion in assets. It navigated the financial crisis better than any other firm on Wall Street.

And even as it continues to wrangle with legal hurdles, whether it was settling claims pertaining to its mortgage products inherited from the 2008 Bear Stearns purchase or foreign currency manipulation among its forex traders, JPMorgan seems to write lawsuits off as a cost of doing business and persists as if nothing happened.

JPMorgan CEO Jamie Dimon is an easy target for anti-Wall Street sentiment, but he doesn't shy away from pointing out that the financial system is still on shaky ground, as he wrote in a 2015 letter to shareholders.

"Many people think Dimon is the financial equivalent of Darth Vader," Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "I believe he may be the only banker on Wall Street who fully understands the big picture."

You could do worse than hitching your wagon to Dimon and JPMorgan stock.

But right now is not the best time to load up on shares of this investment banking dynasty. In fact, doing so means you could miss out on a true profit potential in the banking sector...

Why You Can Do Better than JPMorgan (NYSE: JPM)

There is a hazard you take on by buying big bank stocks.

"Big banks are not the bastions of stability and financial prowess many believe them to be," Fitz-Gerald said. "Big banks may harbor hidden risks."

You see, the investment banking industry becomes less profitable with each day. No investment bank is going to have a blowout earnings season by facilitating buy and sell orders and shaving commission off the top.

Nor is making markets a cash cow.

There's too much competition in those business segments on Wall Street.

The real money is exploring areas where no other investment bank would dare tread.

Structured financial products - the credit default swaps, the interest rate swaps, and really the sale of any other exotic financial instrument - are where the money is to be made.

The problem with the derivatives market is that it's become so large and so thinly regulated, all while serving as one the last few major profit centers for investment banks, that it's concentrating more risk in the financial system.

"Contrary to what Wall Street wants you to believe, derivatives are not investments... in anything. Not stocks, not bonds, not currencies," Fitz-Gerald said. "They are nothing more than legalized gambling, because they are wagers on the expected outcomes of specific events like the failure of Greece to secure sovereign financing and what happens to its national debt when that comes to pass."

The total notional value of derivatives was $220.4 trillion in the fourth quarter of 2014, according to the U.S. Office of the Comptroller of the Currency.

JPMorgan sits on the largest pile in the United States at $63.6 trillion, of which 96% is traded over the counter in the riskier credit derivatives and swaps market.

Luckily, as Dimon has shown, he's a little more in tune with the systemic risks in the banking sector.

Fitz-Gerald added, "He gives JPMorgan a decisive edge over the other big banks, many of which could be brought to the brink of collapse when the next bubble bursts."

But if you don't already own JPMorgan stock, you're better off waiting for when the "next bubble bursts."

JPMorgan navigated the financial crisis quite well. It was approached by the U.S. Federal Reserve to buy Bear Stearns in 2008, in a move paralleled by the same firm in 1907 when investment banking patriarch J. Pierpont Morgan helped orchestrate a bailout of Wall Street.

JPMorgan was also offered Morgan Stanley (NYSE: MS) - for free - from U.S. Treasury Secretary Hank Paulson in 2008.

The firm has a historical record of actually helping the financial system out of crisis when so many other names are helping bring about such crises.

But you can be sure any financial panic, regardless of how well JPMorgan fares, is going to punish the stock price like it did during the last financial crisis.

When that does happen, that's the time to jump in.

"I'd buy them at their lows in a panic sell-off, as a trade," Money Morning Capital Wave Strategist Shah Gilani said.

But if you don't want to wait for there to be blood in the streets to buy bank stocks, here's a real profit opportunity.

Where to Look for Big Bank Stocks

There's a new "disruptor" in consumer lending: peer-to-peer, or P2P.

"The premise of P2P lending is pretty simple: Individuals lend to individuals," Gilani said. "Borrowers are matched with lenders based on who wants to borrow how much for how long - and who's willing to meet those needs based on the prospective borrowers' credit scores and measures of creditworthiness."

Gilani added that it's "a big moneymaking opportunity."

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That's why another big investment name, Goldman Sachs Group Inc. (NYSE: GS), is entering this new arena.

Goldman Sachs recently hired Harit Talwar, former chief marketing officer of Discover Financial Services (NYSE: DFS), to lead the investment bank's online lending business.

And while there are other P2P bank lenders already out there - such as Kabbage, LendingClub Corp. (NYSE: LC), and Prosper - Goldman brings its name and deep pockets into what is right now a very young industry.

"Goldman knows how to assess risk - and is even creating newfangled models that are designed to calculate all the risks of this new lending market," Gilani said. "It also has access to enough money to make billions of dollars in new consumer loans. And it has access to the technology needed to create lending platforms in cyberspace."

We're not saying buy GS stock, as we have the same reservations as with JPMorgan. Instead, we're recommending its P2P lending arm, Goldman Sachs BDC Inc. (NYSE: GSBD), with an 8% yield.

"Goldman knows how to make money," Gilani said. "I have no doubt - whatsoever - that if Goldman brands its online-lending venture properly, and markets it extensively, it will add to Goldman's revenue, net profits, and probably stock price."

Bottom Line: JPMorgan (NYSE: JPM) may be the best name in investment banking, but the profit opportunities are barren in the sector unless you can jump in at a time of panic and buy on the cheap - not at all-time highs. The real opportunity in banking is not with the legacy investment banks and their traditional lines of business, but in the promising P2P lending space.

Jim Bach is an Associate Editor at Money Morning. You can follow him on Twitter @JimBach22.

This Is the Most Important Bank You've Never Heard Of... You have probably never heard of German bank Düsseldorfer Hypothekenbank AG. But a write-down of a mere 348 million euros of its debt forced German banks to step in and bail it out because of its derivatives trading positions. Here's the story behind this one small bank, and why its struggles reveal just how precarious our financial system is...

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