Here’s why this valuable stock grew 56% in almost 3 months

Morgan stanleyof (NYSE: MS) stock struggled through most of 2020, with many of its peers in the financial sector. But the situation has been different in recent months, with the stock having risen 56% since the end of October.

This stellar performance is due to a few factors. Key acquisitions, the Fed’s lifting of limits on share buybacks, and a wider market rotation between growth stocks and value stocks all played a role in the rise in Morgan Stanley shares.

The sudden surge may lead investors to wonder: will good times continue to roll for Morgan Stanley in 2021?

An investment bank.

Image source: Getty Images.

What drives stock prices up?

While financials have underperformed the market for much of 2020, they have been in a much stronger position in recent months, as shown in SPDR Selected Financial Sector ETF, which is up nearly 29% since the end of October. Meanwhile, a significant rotation from growth stocks to value stocks has helped push up sectors such as financials and energy. This rotation was a positive wind for Morgan Stanley, which had been strongly dismissed last year, to the point where CEO James Gorman questioned the valuation of the company.

Morgan Stanley saw its stock price drop from less than $ 48 on October 28 to almost $ 75 by the market close on Friday, gaining 56% during that time. This made it one of the best stocks in the financial industry around this time, with some competition Goldman Sachs and Charles Schwab, which gained 52% and 53% respectively.

Investors are optimistic that the company will continue the process of integrating E * trade and Eaton Vance in the years to come. The company spent $ 20 billion on these acquisitions in 2020 in an effort to fill gaps and offer complementary services to its clients through its electronic trading platform. The merger with E * Trade was finalized in October and the merger with Eaton Vance is expected to be finalized in the second quarter of 2021.

As the company integrates these acquisitions, investors can expect both top and bottom results to improve in the months and years to come. Management anticipates that the acquisitions will help the company generate 58% of its pre-tax earnings through wealth and asset management on a pro forma basis. This will help it continue to expand into these segments, which only accounted for 26% of its profits 10 years ago.

Additionally, in December, the board of directors approved a $ 10 billion share buyback program after the Federal Reserve eased restrictions on banks during the coronavirus pandemic. The lifting of this moratorium on share buybacks will be another positive wind to support the company’s share price.

Another period of exceptional income

Morgan Stanley announced its fourth quarter results on January 20 and they blew analyst estimates. With earnings per share (EPS) expected to be $ 1.29 and revenue to be $ 11.3 billion, the investment bank easily topped both, posting EPS of 1, 81 USD on a turnover of 13.6 billion USD. This represents growth of 26% for EPS and 39% for revenue compared to the same quarter last year, and was fueled by growth in various segments, including investment banking, fixed income securities trading and wealth management.

Wealth management revenue rose 24% to $ 5.68 billion, a good sign for a bank that has made a concerted effort to grow in this segment. Year over year, the investment bank has seen revenue increase 16% while EPS has increased 24%, despite challenges posed by the global pandemic.

And after?

The financial sector is expected to benefit from the recovery in economic activity in 2021 and 2022. According to a report by Swiss credit, improved credit conditions and higher interest rates will be positive for the sector as a whole. For this reason, the Credit Suisse research team believes that financial stocks are value games.

With a cheap valuation, Morgan Stanley is well positioned. While the stock isn’t quite the bargain it was in November, the company still has a price-to-earnings (P / E) ratio of 11.5, which is lower than Schwab at 27.6 and a hair under Goldman Sachs, at 11.7.

Positive economic development, improving credit conditions and an overall return to normal will help boost financial stocks. Morgan Stanley will benefit from these favorable winds while broadening its offering and increasing its bottom line, making it a must have in your portfolio.

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