An analyst upgraded Morgan Stanley to a buy. Why aren’t we ready to follow suit

VaselineOctober 5, 2024

0 3 minutes read

An analyst upgraded Morgan Stanley to a buy. Why aren’t we ready to follow suit

New optimism about Morgan Stanley helped its shares close Friday’s session at their highest level of the year. Jim Cramer isn’t sure yet what the club’s next move should be. Morgan Stanley’s persistent underperformance has made the stock one of our thornier positions – so much so that Jim has openly considered ditching it for investment banking rival Goldman Sachs. Deal-making activity picked up, but it wasn’t enough to fully unlock Morgan Stanley’s stock. This is largely because the bank’s wealth management division has failed to impress. Analysts at HSBC see better days ahead for Morgan Stanley and in a note to clients late Thursday upgraded the stock to a buy rating from hold, arguing that its “long period of underperformance may be coming to an end.” Among the reasons for the call: A healthy market environment should support the financial performance of both its investment banking and wealth management operations, analysts said. They added that negative sentiment around stocks in general appears to have bottomed out. Morgan Stanley shares rose more than 3 percent to $107.88 apiece on Friday, helped by both HSBC’s upgrade and better-than-expected jobs data that boosted the entire banking sector, including the Wells Fargo portfolio. Morgan Stanley closed Friday down a dollar from its highest close of $108.73 hit in February 2022. Still, the stock is up just 15.7% year to date and 36.4% over the past 12 months , lagging behind the KBW Bank index. which climbed 19.4% and 52.6% respectively in those time frames. For its part, Goldman Sachs is up 28.4% so far in 2024 and 60.5% in the past year. Friday’s positive developments are welcome news, but not enough to add clarity to our path forward for Morgan Stanley. We maintain our hold-equivalent 2 rating on the stock. “Honestly, I think (Morgan Stanley) doesn’t have a price for a good IPO market and (Goldman Sachs) is,” Jim said Friday. “The reason is because I think people think the wealth advisory business is not doing as well as it can be, and buying E-Trade doesn’t seem to be working,” Jim said, referring to the $13 billion purchase dollars by Morgan Stanley. of the brokerage firm in 2020. “We don’t have answers for that yet, so I can’t say we’re going to upgrade.” However, there is hope that Morgan Stanley shares could climb higher if its sizable investment banking business continues its recovery. For this to happen, there needs to be a more significant resurgence in initial public offerings (IPOs) and mergers and acquisitions (M&A) after more than two down years for both trading markets. Banks such as Morgan Stanley and Goldman Sachs have long relied on fee-based income from transactions. The more activity there is, the more fees are available to collect. The emerging rebound has already appeared in Morgan Stanley’s results. In the second quarter, revenue for the company’s investment banking segment rose 51% year-over-year. Meanwhile, advisory and equity underwriting fees both rose 30% and 56% respectively over the same period. However, the trading environment has not returned to normal. During an industry conference in September, Morgan Stanley co-chairman Dan Simkowitz said M&A and IPOs will likely remain below trend through the end of the year. To be sure, the executive also forecast that activity will accelerate in 2025 as the Federal Reserve’s interest rate-cutting efforts ripple through the economy. Morgan Stanley’s wealth management franchise — a major growth priority for the bank — is a lingering concern after last quarter’s earnings miss sent shares briefly lower. Meanwhile, Goldman Sachs beat analysts’ expectations on wealth income. Morgan Stanley’s quarterly results on Oct. 17 will provide an important look at whether this challenged part of its business shows any reason for optimism. For now, the Club is taking a wait-and-see approach with Morgan Stanley shares. If there is an increase in IPO and M&A activity that HSBC has forecast, Morgan Stanley is well positioned to benefit. “If we get offers, (Morgan Stanley) will be a good place to be,” Jim said. (Jim Cramer’s Charitable Trust is long MS, WFC. See a full list of stocks here.) As a subscriber to the CNBC Investment Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO THE TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. NO FIDUCIARY OBLIGATION OR OBLIGATION DUE TO YOUR RECEIPT EXISTS OR IS CREATED. OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT IS GUARANTEED.

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Optimism found on Morgan Stanley helped its stock close Friday’s session at its highest level of the year. Jim Cramer isn’t sure yet what the club’s next move should be.

VaselineOctober 5, 2024

0 3 minutes read

Vaseline

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