Schaeffer's Trading Floor Blog

Weekly Contrarian: Why Underloved Morgan Stanley (MS) Could Run Even Higher

Lingering pessimism could add to MS' upward momentum

by 10/24/2013 11:00 AM
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According to a recent MarketWatch article, Morgan Stanley (NYSE:MS) "has historically been one of the leaders in investment banking," even though the firm suffered a setback from the 2008 financial crisis, along with the rest of its peers. In fact, after the banking sector's typical business model was revamped, MS shed more than 80%, and the company found itself transitioning into a more traditional bank-holding firm with tighter regulations.

However, since that time, MS has been in recovery mode, aided by a deal with Citigroup Inc (NYSE:C) in 2009, which merged the two companies' wealth-management units -- resulting in the largest global full-service brokerage. Also of note, the author opines that "recent developments appear solid," as second-quarter earnings topped the consensus view. Additionally, the firm announced a $500 million share repurchase program. Despite the stock's subsequent gains, MS remains below its 2007 highs.

The article goes on to point out the financial concern's growth prospects down the road, particularly as interest rates return to "more normal levels." The author also points out that the "glass half empty" view toward the banking industry's evolving paradigm sets MS up for possible unexpected upside. Furthermore, the company's Smith Barney operations -- which made up 52% of MS' 2012 revenue, versus 31% in 2007 -- has added an air of stability to its earnings potential. In conclusion, the piece surmises that "even with the significant gain in share price over the past year, we believe Morgan Stanley has further to go on the upside."

Contrarian Perspective

In addition to its 70% year-over-year advance, MS has gained almost 53% in 2013 alone, while also besting the broader S&P 500 Index (SPX) by north of 6 percentage points during the past two months. In fact, the stock tagged a new multi-year high of $29.97 on Oct. 18, thanks to its well-received third-quarter earnings report. Meanwhile, a look at the charts shows that the security's 20-week moving average has cushioned a handful of pullbacks since August 2012.

However, there is still some skepticism lingering toward MS. In terms of analyst ratings, seven out of 20 brokerage firms have handed out "hold" or worse suggestions. Meanwhile, the security's average 12-month price target of $29.46 reflects a premium of less than 1% to the stock's current perch at $29.26. This leaves the door open for a round of upgrades and/or price-target hikes, which could add fuel to the equity's technical fire.

Elsewhere, Schaeffer's put/call open interest ratio (SOIR) for Morgan Stanley (NYSE:MS) checks in at 2.07, confirming puts more than double calls among options with a shelf-life of three months or less. This ratio ranks higher than 99% of similar readings taken within the past year, indicating near-term speculators have been more put-focused toward the stock just 1% of the time over the last 52 weeks. An unwinding of these positions -- especially within the November series of options -- could end up serving as a tailwind over the next several weeks.

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