JPMorgan’s $5.56 million leveraged autocalls to offer worst-of exposure to big tech stocks

By Emma Trincal

New York, Oct. 5 – JPMorgan Chase Financial Co. LLC’s $5.56 million of 0% market-linked securities – autocallable with leveraged upside participation and fixed percentage buffered downside due Sept. 29, 2026 linked to the stock performance of Microsoft Corp., Alphabet Inc. and Apple Inc. offer exposure to three high-growth, popular names with attractive terms but risks emerge with single stock underliers and worst-of payout, advisers said.

The notes will be automatically called at par plus a 25.2% call premium if each stock closes at or above its initial level on Sept. 30, 2024, according to a 424B2 filing with the Securities and Exchange Commission.

If each stock finishes at or above its initial level, the payout at maturity will be par plus 1.5 times the return of the least-performing stock.

Investors will receive par if the worst performer declines by no more than 20% and will lose 1% for every 1% decline of the worst performer beyond 20%.

Call, buffer

Steve Doucette, financial adviser at Proctor Financial, said he usually avoids single stocks. But the note was appealing for its ability to generate excess return over the worst-of underlier.

The autocall scenario was attractive even for Doucette, who is usually reluctant to cap his upside.

“If the stocks are up only a little bit or even flat, you’ll outperform. You’ll be on the way out the door with 25% in your pocket in just a year. Who’s going to complain about 25%?” he said.

“If you’re wrong, you have the buffer and again, you’ll outperform. Even if one of the stocks plummets, if it’s down 40%, you’ll be down 20%, you still beat the stock.”

Worst-of exposure

The upside scenario may bring some risk due to the worst-of payout.

“If one stock is up 2% and the other jumps 20%, you get 3% in three years and not 30%. The leverage is not a perfect tool when a stock hardly moves,” he said.

The three stocks may not show such disparities of return as in his example, he said.

“But you can’t count on it. You can’t rationalize correlation when you deal with individual companies,” he said.

One possible use of the notes would be as a complement to an existing position in the same three stocks, he said.

“You own them in your portfolio. You don’t know where they’re going. The note is a great way to capture some potential outperformance,” he said.

Magnificent three

But the exposure to individual stocks is a significant risk, he added.

“We always try to avoid taking the risk associated with a specific company, even if you’re talking about three of the Magnificent Seven,” he said.

The so-called “Magnificent Seven” are seven of the biggest high-growth U.S. tech stocks. Those are: Amazon.com Inc., Tesla Inc., Alphabet Inc., Microsoft Corp., Apple Inc., Nvidia Corp. and Meta Platforms Inc.

Company risk

Doucette pointed to “company risks,” which can impact the bottom line of any business, such as operational, credit or liquidity risks, among others.

“You always have events that can hurt the earnings of any company, no matter how big it is,” he said.

“It could be anything – technology disruption, AI blowing up, accounting issues, negative headlines – if anything goes wrong with one of those companies, you could see the stock price fall on its face. Go back and think: Enron. Enron and some others were the Magnificent Seven of the time.

“I always shy away from stocks for that reason. Anything can happen in any company,” he said.

Tradeoff

As an alternative, Doucette would be looking for a weighted basket of stocks.

“If I use stocks, I don’t want the worst-of. I’d look for a weighted average and see what I could get on the upside,” he said.

The leverage multiple, call premium, tenor or uncapped feature may be modified.

“You’d have to give up something. But that’s what I would explore,” he said.

Entry point

Matt Medeiros, president and chief executive of the Institute for Wealth Management, is also cautious with individual stocks. But he said the three picks were appealing.

“This is a very interesting note,” he said.

“I like the underliers. They’re all trading off their highs. I see an opportunity.”

Microsoft and Apple are currently trading 13% and 12% off their respective one-year highs of July. Alphabet is 3% lower than its one-year peak of last month.

While the three “Magnificent Seven” are currently trading at prices Morningstar stock analysts deem overvalued, their price-per-earnings ratios are much lower than other names such as Nvidia. Compared to their historical levels, the P/Es of the underliers are now in a more normal range, he noted.

“I see some good upside potential over a three-year period,” he said.

Worthwhile structure

The terms of the notes were also favorable to investors.

“Even if it’s a worst-of, the fact that there’s leverage with no cap on the upside makes it very attractive,” he said.

The 20% buffer improved the risk-return profile of the security.

“That’s the buffer size I would be negotiating with an issuer and be very happy with,” he said.

The call premium exceeded the levels seen in comparable products, he noted.

“If I get called in one year at 25.2%, I would be ecstatic. I’d be looking for the next opportunity,” he said.

Noteholders will not get the best performance of the three stocks. But they would be likely to outperform the worst-of.

“One stock could be up 50% and you would miss that exposure. But it doesn’t matter to me. This is not the kind of market where it pays out to be greedy,” he said.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC and Wells Fargo Securities, LLC are the agents.

The notes settled on Sept. 29.

The Cusip number is 48134AYU3.

The fee is 2.575%.

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