Morgan Stanleyin (NYSE: MS) stocks fought for much of 2020, along with many of their peers in the financial sector. But the story has been different in recent months, with stocks rising 56% since the end of October.
This stellar performance is due to a few factors. Major acquisitions, lifting the Fed’s limitations on stock repurchases and a broader rotation of the growth stock market for value stocks contributed to raising Morgan Stanley’s shares.
The sudden increase may make investors wonder: Will the good times continue for Morgan Stanley in 2021?
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What is raising stock prices?
Although the financial sector underperformed the market for much of 2020, they have been in a much stronger position in recent months, as seen by Financial selection sector SPDR ETF, which represents an increase of almost 29% since the end of October. During that time, a large turnover from growth to value stocks helped to elevate sectors such as finance and energy. This rotation was in favor of Morgan Stanley, who had suffered a huge discount last year, to the point that CEO James Gorman questioned the company’s assessment.
Morgan Stanley saw its stock price rise from less than $ 48 on October 28 to almost $ 75 at the close of Friday’s market, gaining 56% during that period. This made it one of the best stocks in the financial sector at that time, alongside competitors Goldman Sachs and Charles Schwab, which gained 52% and 53%, respectively.
Investors are optimistic about the company as it continues the process of integrating E * trade and Eaton Vance in the coming years. The company spent $ 20 billion on these acquisitions in 2020 in an effort to fill gaps and offer complementary services to its customers through its e-commerce platform. The merger with E * Trade was completed in October and the merger with Eaton Vance is expected to close in the second quarter of 2021.
As the company integrates these acquisitions, investors can expect an increase in revenues and financial results in the coming months and years. Management has projected that the acquisitions will help the company generate 58% of its pre-tax profits from managing assets and assets on a pro forma basis. This will help it to continue its expansion in these segments, which represented only 26% of its profits 10 years ago.
In addition, in December, the board of directors approved a $ 10 billion share buyback program after the Federal Reserve eased restrictions imposed on banks during the coronavirus pandemic. The lifting of this stock buyback moratorium will be another favorable factor to support the company’s share price.
Another stellar earnings period
Morgan Stanley announced its fourth quarter earnings on January 20, and they blew up analysts’ estimates. While earnings per share (EPS) were expected at $ 1.29 and revenue was $ 11.3 billion, the investment bank outperformed both, recording earnings per share of $ 1.81 over revenue of $ 13.6 billion. This represents an increase of 26% for EPS and 39% for revenue for the same quarter last year, and was driven by growth in several segments, including investment banking, fixed income trading and asset management.
Revenue from wealth management grew 24% to $ 5.68 billion, a great sign for a bank that has made a concerted effort to expand in this segment. Year after year, the investment bank saw revenue grow 16%, while EPS grew 24%, despite the challenges imposed by the global pandemic.
What is the next?
The financial sector is expected to benefit from the recovery in economic activity in 2021 and 2022. According to a report by Swiss credit, improving credit conditions and increasing interest rates will be positive for the sector as a whole. For this reason, Credit Suisse’s research team believes that financial stocks are played with good value.
With a cheap valuation, Morgan Stanley is well positioned. Although the shares aren’t exactly the bargain for November, the company still has a price / earnings (P / E) ratio of 11.5, which is below Schwab at 27.6 and a hair below Goldman Sachs at 11, 7.
Positive developments in the economy, improved credit conditions and a general return to normality will help boost financial stocks. Morgan Stanley will benefit from these favorable winds by expanding its offerings and increasing its financial results, making this action unique in its portfolio.