JPMorgan’s contingent interest autocalls tied to biotech ETF bring value to income investors

By Emma Trincal

New York, Sept. 16 – JPMorgan Chase Financial Co. LLC’s autocallable contingent interest notes due March 20, 2024 linked to the SPDR S&P Biotech ETF should appeal to investors seeking cheaper underliers in a U.S. market that remains overvalued, said Steven Jon Kaplan, founder and portfolio manager of True Contrarian Investments.

Investors will receive a coupon of 14% per annum, payable quarterly, if the underlying fund closes at or above its 60% interest barrier on the related quarterly review date, according to a 424B2 filing with the Securities and Exchange Commission.

The securities will be called automatically at par plus the contingent coupon if the price of the underlying fund is greater than or equal to its initial level on any quarterly review date.

If the notes are not called and the ETF share price finishes at or above the trigger level, 60% of the initial price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will be exposed to the price decline from the initial price.

One major advantage of the note was the choice of the underlying fund, said Kaplan.

Diversified ETF

“It’s a well-diversified ETF. You have a large number of holdings compared to other sector ETFs. Not one stock makes more than 3% of the portfolio,” he said.

The ETF has 133 holdings. The highest weight is 2.75%, according to the fund’s website.

“XBI is relatively undervalued compared to other U.S. ETFs. Back in the spring, it was a better bargain but at least it’s still much cheaper today than it was in February 2021,” he said.

The ETF, which is listed under the ticker “XBI,” peaked in February 2021 at around $175 a share and has dropped more than 52% since. The ETF closed on Friday at $83.27.

Fundamentals

“It’s a big decline. But even a big price drop like this doesn’t necessarily mean it’s a bargain. You can’t just rely on the chart. I also look at the fundamentals,” he said.

And the SPDR Biotech fund showed satisfying metrics, he added.

He pointed to the 12.36 price-per-earnings ratio.

“It’s about half the P/E of the S&P.”

The low price-to-book and the average profit growth of the fund’s components suggest that the underlying was “relatively undervalued,” he added.

Vaccine mania

What pushed the share price to nearly triple from the March 2020 bear market to the February 2021 high was the rush for Covid-19 vaccine stocks, he said.

As the world was struggling with the pandemic, biotech stocks became increasingly popular, he noted.

“The first Covid vaccines had just come out. Everybody was looking for the next Moderna. People were buying biotech stocks like lottery tickets. This mindset, which was amplified by social media and news stories, created a lot of euphoria. Investors were looking for the next new thing, the next miracle drug or vaccine. But since there wasn’t much of a ‘next thing,’ the trend began to revert at that point,” he said.

Many stocks especially small-company stocks, which comprise most of the fund’s holdings, declined at the time, he noted.

“Every bull market ends the same way: smaller companies go down first,” he said.

“This is a pattern that has repeated itself many, many times in the past.”

It was the case in the late 1920s: small caps began to fall in 1928 ahead of the September 1929 crash, he said.

The same thing occurred again in 1997-98 when smaller stocks fell before the burst of the dot.com bubble in March 2000. The bear market of the 1970s followed the same pattern.

Double bottom

For patient value investors, a recent window of opportunity to buy the shares of the SPDR Biotech ETF was in the late spring, he noted.

“It had a double bottom in May and June, trading at around $62. That’s when I bought the ETF. A lot of insiders were buying at that time, including a lot of CEOs. So, observing this pattern plus the fact that you had a lot of inflows, I went long the fund during that time,” he said.

Kaplan said he sold his shares in August at around 94. His trigger again derived from the observation of what insiders were doing.

“It was the price insiders were selling it at, which I use as a trade signal,” he said.

Kaplan said he “respects” what insiders are buying or selling.

“I have put in orders to buy it again if it drops below 70. Why 70? It just seems like insiders are buying at that price,” he said.

When following insiders, Kaplan said he looks for large-size orders and preferably orders that have been placed by the most influential executives at the top.

Gains over 60%

While not perfect, the entry price for the notes was still attractive, he said.

“For buyers of an autocall, getting the best price is not as important because you don’t participate in the upside. You just want the price not to drop below the barrier level. That’s all you need. That’s how you get paid and that’s how you don’t lose money. Nothing else matters,” he said.

“Today’s price is not as cheap as it was in May or June. But you’re much better off at $83 a share than at $175 about 18 months ago, especially with the 40% barrier.

“This fund is one of the most undervalued there is in the U.S. market right now. Aside from gold miners, there are not too many sectors were you can find bargains,” he said.

“The 14% coupon is very reasonable too. Of course, it’s always better to get cumulative payments, which you don’t have here.

“But at least you collect your income if the ETF is not down more than 40% which gives you a fair chance of getting a decent return.”

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes were expected to price on Sept. 15 and to settle on Sept. 20.

The Cusip number is 48133MYV6.

The fee is 2.75%.

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