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Politics Point to Profits for Morgan Stanley

11/09/2017 5:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Bank stocks and financial firms are back in style, now that interest rates are rising again and improving net investment income, observes Mark Skousen, editor of The 1600 Alert, an advisory service focused on political trends that impact the markets and individual stocks.

The potential tax reform pushing its way through Congress also could boost bank earnings. We have a prime example in our portfolio.

Morgan Stanley (MS) has been a big winner for us, and it is now enjoying a double-digit-percentage gain. According to Barron’s, Morgan Stanley is now America’s top bank, and has an upside potential gain of 20% by the year's end.

Business is booming. The banking giant is having its best year since 2006. It already has brought in a net income of $5.5 billion since the beginning of the year through the end of September.

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The key to Morgan Stanley’s success gradually has been shifting from high-risk trading in stocks and bonds to wealth and asset management.

Assets under management have grown to more than $1 trillion from around $700 billion in 2014. The bank’s lending balance also has risen from a mere $39 billion at the end of 2013 to around $80 billion today. 

The interest income it earns within the wealth management division has risen $1.6 billion over a similar time period, going from $1.9 billion in 2013 to $3.5 billion last year. That income could climb to as much as $4 billion this year, according to Barron’s.

This is not to say that Morgan Stanley has abandoned its trading division. The bank did top CEO James Gordon’s $1 billion quarterly target for bond trading revenues in the most recent quarter.

Morgan Stanley’s stock is still relatively cheap, trading at 12.5 times estimates of forward earnings, below the industry average of 18. 

Its price/earnings to growth (PEG) ratio is 0.98 (anything less than 1 is considered excellent). It also has had a rising dividend policy since the financial crisis of 2008.

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