Last week, Instinet analyst Steven Chubak had a chance to tout the investment potential of financial powerhouse Goldman Sachs Group Inc (NYSE:GS). He didn’t. Rather, he made it clear he still prefers Morgan Stanley (NYSE:MS), reiterating his “Buy” rating on MS stock in a note about Goldman.
The case? In short, Goldman Sachs’ revenue growth has been tepid and will continue to be in the near future. Only increased spending will help boost the top line.
Conversely, Chubak feels Morgan Stanley offers a higher-quality mix of revenue, meaning the company does more business in higher-margin arenas than its rival.
The thesis holds water. On the other hand, the old “timing is everything” cliche applies here. Now may not be the ideal time to step into MS stock.
Right Stock, Wrong Time
Chubak’s exact words regarding Goldman:
“Following post-election euphoria, investor sentiment has turned more negative on Goldman Sachs, as franchise concerns (particularly on FICC) have overwhelmed deregulation hopes. In addition, many investors were dismissive of Goldman Sachs’ recently announced $5bn revenue growth plan, prompting us to conduct a deeper dive into revenue targets / lending opportunity. While we were hoping our findings would support a more constructive (and arguably contrarian) view on Goldman Sachs’ shares, there remain three key factors that keep us on the sidelines.”
Those three factors, by the way, were delayed revenue growth, a secular slowdown and a shift toward less profitable business lines.
Conversely, the Instinet analyst likes Morgan Stanley’s predictable bottom line. Chubak also notes that President Donald Trump’s proposed tax plan could prod Morgan Stanley’s earnings 12% higher, whereas Goldman would only see a 3% improvement. If nothing else, the scenario bodes well for the MS stock dividend.
It’s all quite compelling, to be sure. MS stock itself, however, suggests investors may be able to get in at a lower price by exercising just a little patience.
The chart tells the tale. After bumping into a resistance line (red) that’s been in play since late 2015, shares peeled back right on cue. Any worthwhile Morgan Stanley stock analysis must also make note of the fact that while shares have been on an impressive run since early 2016, the volume behind the effort has been minimal.
This isn’t to suggest the stock can’t or won’t break above that long-standing technical ceiling and break out at an even faster pace. However, it does suggest that shareholders and followers of the company are already second-guessing themselves.
Indeed, it wouldn’t take much of a shove at all to tip the wobbly rally effort over on its side. A break under the 200-day moving average line (green) at $45.80 could easily trigger a wave of selling and profit taking. Though the risk of such an outcome isn’t abnormally high, it’s high enough that would-be buyers may want to check out other options.
Looking Ahead for MS Stock
The irony is that Morgan Stanley itself may be giving you the penultimate reason to steer clear of MS stock here. As our own Dana Blankenhorn described just last week:
“But Morgan Stanley itself is saying the bull market may be about to end. It sees too much leverage in the economy, too much exuberance among investors and a high likelihood that the Federal Reserve will raise interest rates.”
While his assessment — Morgan Stanley’s assessment — doesn’t squarely acknowledge the likelihood of an “in between” situation where growth is stymied but not outright stopped, his point is well-taken.
The bottom line is that between the chart’s technical headwind and the possibility of a bubble-bursting meltdown of an overvalued market, there’s not a great deal of reason to take on a new trade in this name now.
That time was a year and a half ago. Never even mind Blankenhorn’s other point that when all is said and done, Morgan Stanley’s top line just hasn’t been all that impressive for the past few quarters.
There are more fruitful, safer options out there than MS stock. Only time and a little growth (and maybe a healthy pullback) can make this name a top option from the financial sector again.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @jbrumley.
