Adding To Morgan Stanley (MS) Into A Federal Reserve-Induced Sell-Off

30 Nov 2021 1:50 PM EST

We’re using a Federal Reserve’s induced volatility today to add to our position in stocks that should benefit from what was said - financials. 

Earlier this morning, in a testimony in front of the Senate Banking Committee, Chairman of the Federal Reserve Jerome Powell stated that the Federal Reserve will consider accelerating the tapering process in the coming weeks. https://www.cnbc.com/2021/11/30/powell-says-fed-will-discuss-speeding-up-bond-buying-taper-at-december-meeting.html. 

As a reminder, after the tapering process ends, this opens the opportunity for the Federal Reserve to raise interest rates. Based on rough calculations, if the Fed decides to double the tapering pace, the process will end in February of next year. This opens Spring 2022 for the first window of interest rate hike. However, remember that the Fed does NOT have to raise rates immediately after end of tapering. Also, how aggressively rates will be raised, has not been telegraphed. It’s important to note that Powell has not telegraphed when and how raise of interest rates will happen. All predictions are currently just that, predictions. 

Into sell-offs, we recommend looking for companies with strong balance sheets, healthy dividend payments, and consistent share repurchase programs as stocks to buy. Companies with all three usually can withstand and find support in volatile markets. We’re looking at the financial sector right now, because they would benefit the most from potential raise of interest rates. This is exactly the case for Wells Fargo, but not so much for Morgan Stanley. Morgan Stanley is in the wealth management business, and even though not directly related to rates, there is some degree of correlation between how MS trade vs how rates behave. Morgan Stanley is more levered to capital market activities and investment banking fees.

With shares down 4% from our cost basis, we are raising our weighting in the Morgan Stanley (MS) position to 8%. Shares are approaching the 200-day Moving Average, which we expect to be support here. We will continue to assess the situation, and send out notes.

The same technical take is true for Wells Fargo (WFC), with shares approaching the 200-day moving average. However, on this position, we will hold off on buying unless we can substantially improve our cost basis, because shares are pretty much right at where our average cost basis is.

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, which currently trades at a 13x forward PE. 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 2.9%, much higher than the 10-Year Treasury Yield.