Morgan Stanley: A pullback, then a big rally?

With a stronger board and an improving macro-environment, the bank's shares could double this year even if Q4 results disappoint.

By TheStreet Staff Jan 17, 2013 2:51PM

Bank sign copyright John Foxx, Stockbyte, Getty ImagesBy Marc Courtenay thestreet logo

 

The financial sector, especially some of the big banks and the best-managed regional banks, had a good year in 2012.

 

Who would have dreamed at the end of 2011 that Bank of America (BAC) would go up more than 100% in 2012?

 

Among the many astute analysts, TheStreet.com's Jim Cramer believes, "The days of the radical revaluation of banks is now upon us. The days when we sit there and say 'they are awful because of the net interest margins' are being put behind us. The days when we worried about the government every minute are behind us, too."

 

In an editorial on TheStreet entitled "New View on Banks Starts Today," Cramer opined, "Now it is just time to make money and it is important to recognize that because of the difficulties of the previous era and how hard it is now to run the new gauntlet of regulations, there will only be a handful of companies that can dominate in each space and they will make fortunes."

 

He cited Goldman Sachs (GS), which reported blow-out earnings and revenue Wednesday. GS reported that in its fourth quarter ending Dec. 31 it had earnings of $5.60 per share, $1.96 better than the Capital IQ consensus estimate of $3.64.

 

Revenue rose 52.7% year over year to $9.24 billion, versus the analysts' consenus estimate of $7.67 billion. No wonder shares of GS rallied over 4% on double the average daily volume.

 

We're getting excited about other promising investment bank and regional bank earnings reports.

 

Recently, I wrote a timely article on SeekingAlpha: "Identifying Stocks That May Double within a Year." In it I made reference to swirling reports that Morgan Stanley (MS) may be the next financial that sees its stock price double in the year ahead.

 

I wrote, "You may have seen the Bloomberg article on Wednesday, Jan. 9, quoting Daniel Loeb, who runs the hedge fund Third Point LLC. The Bloomberg headline read, 'Morgan Stanley Shares May Double, Loeb's Third Point Says.'"

 

The article quotes Loeb as saying that "Morgan Stanley shares may double as brokerage margins improve and management devises a 'bold fix' for the fixed-income trading business." The story goes on to say that "the hedge fund bought shares at an average cost of $16.77, 15% below [Jan. 8th's] close of $19.65," according to Third Point's Jan. 9 letter to investors. 

 

MS will step into the earnings confessional on Friday before the markets open to report on its 2012 fourth quarter. The average estimate on earnings per share is 27 cents compared to the year-ago quarterly loss of 14 cents.

 

The consensus estimate on revenue is also looking bright for MS. Analysts' average estimate is for sales growth for the quarter of $7.02 billion, almost a 23% increase over the same quarter in 2011. MS is coming off a string of disappointing quarters, and if Friday's report is a disappointment, look out below!

 

That might set the stage for a correction that will enable patient investors to buy shares closer to where Loeb's hedge fund did its purchasing. The one-year chart below illustrates what we've seen and what may be about to unfold.

 

ms chart 1

 

As you can plainly see from the chart, MS' quarterly revenue-per-share numbers better be extraordinary to help support the current share price, which closed on Wednesday at $20.54. A recent Forbes article presented more details concerning Dan Loeb's "Morgan Stanley bet."

 

As often happens when activist investors get involved, Loeb's investment may be the catalyst for a major shakeup of the MS board of directors. "CLSA analyst Mike Mayo thinks that a little pressure from Third Point might just help Morgan Stanley capture more of its franchise value," the Forbes article stated.

 

To give us some perspective as to where MS shares may be 12 months from now, the Forbes article went on to say, "Mayo has a 12-month price target of $27 on Morgan Stanley, but estimates the business' franchise value at around $40 per share. That squares up with Loeb, who writes that the combination of a FICC restructuring, a stronger board and a generally constructive macro environment means shares should 'nearly double' from recent levels."

 

That would be especially doable if shares corrected to below $18, but only time will tell.

 

The regional bank sector has done well and is poised to do even better in 2013. Below is a five-year chart of the iShares Dow Jones US Regional Banks ETF (IAT). It's been a long road back from the 2009 lows.

 

ms chart 2

 

Notice the huge spike in volume at the end of 2012. The combined anticipation of the Federal Reserve's endless Quantitative Easing and the hope for a better year ahead started the ball rolling uphill. Two of the top 10 holdings in the IAT ETF are very promising, and insider buying helps verify this.

 

BB&T (BBT), which operates as a financial holding company for Branch Banking and Trust Company in Winston-Salem, N.C., makes up 7.2% of the holdings of IAT.

 

BBT will report earnings Thursday, and the expectations by analysts are realistic if not conservative. EPS is expected to be higher by an average estimate of 27% although quarterly revenue growth may only rise by less than 2%. BBT pays an 80 cent annual dividend.

 

Another holding of IAT is one of Jim Cramer's favorite regional banks (and mine, too), Keycorp (KEY), which hit a 52-week high on Wednesday on heavy volume closing at $9.15. It is scheduled to report its fourth-quarter 2012 earnings on Jan. 24.

 

KEY's CEO and CFO hold a combined 787,905 shares of the Cleveland, Ohio-based company's shares. Analysts estimate just a slight improvement in KEY's fourth-quarter EPS compared to the year-ago quarter, but they also estimate nearly an 8% increase in quarterly revenue. KEY may even be a takeover target!

 

Keep a close watch on the big investment banks Morgan Stanley and Goldman Sachs. At the same time, consider the regional banks including BBT and KEY, which should also offer plenty of bang for the buck if purchased on dips and pullbacks.

 

This year may end up being "The Year of the Bank Stocks!"

 

At the time of publication the author had a position in KEY.

 

 

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