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(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)
After you receive this post, we will be buying 75 shares of Morgan Stanley (MS) at roughly $95.95. Following the trade, the Charitable Trust will own 875 shares of Morgan Stanley. This buy will increase Morgan Stanley’s weight in the portfolio from about 1.84% to 2.01%.
Bank stocks are under pressure Friday as rising Covid-19 cases abroad and news of a nationwide lockdown in Austria have investors concerned about the outlook for global economic growth. As a result, interest rates are sliding and so are bank stocks because they can make more money off their asset base when rates are higher.
But we question why Morgan Stanley is down more than 2% and now $10 off its high for something happening in Austria, especially when considering the significant progress made in combating the virus. Even with the concerning rise in case counts, we think the end of the pandemic is still in sight thanks to the approval of vaccine boosters, the development of highly effective antivirals, and the wide availability of rapid tests.
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Additionally, Morgan Stanley isn’t an interest rate-sensitive bank! They are levered to capital markets activity and investment banking fees, making today’s decline even more puzzling. We think MS is wrongly getting dragged lower today because it is in the trading playbook to sell the banks when rates go lower, creating a dip that we think is an opportunity.
Our Morgan Stanley thesis
From a higher level, our investment thesis on Morgan Stanley primarily relates to the bank’s transformed business model and emphasis on fee-based and recurring revenue streams through the acquisitions of E-Trade and Eaton Vance.
Investors like fee-based and recurring revenue streams because they are predictable. Wall Street puts a high value on recurring revenues because they are easier to forecast with greater certainty.
As fee-based and recurring revenue streams become the majority of Morgan Stanley’s total revenues, we think the market will reward MS for this transformation by applying a higher price-to-earnings multiple on the stock.
Morgan Stanley also has a strong commitment to returning capital to shareholders. The bank bought back roughly $3.6 billion worth of shares in the third quarter as part of their $12 billion authorization. On top of share repurchases, the dividend yield here is not too shabby either. At the current price, the dividend yield is 2.92%, or nearly double the 10-Year yield.
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As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Typically, Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If the trade alert is sent pre-market, Jim waits 5 minutes after the market opens before executing the trade. If the trade alert is issued with less than 45 minutes in the trading day, Jim executes the trade 5 minutes before the market closes. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.
(Jim Cramer’s Charitable Trust is long MS.)
