Morgan Stanley (MS), And How Mr. Market Determines Potential

The negative to the recent earnings announcements is the stock market volatility. Goldman Sachs Group, Inc. (NYSE:GS), BlackRock, Inc. (NYSE:BLK), and Morgan Stanley depend heavily on the stock market for income. There are many macro risks that could potentially cause the stock market to crash. For whatever reason, stock investors are extremely fickle. If something negative were to happen, similar to the Japanese tsunami, Greece default, or a repeat of Cyprus, the stock market could be hit with some volatility that could hurt quarterly earnings.

Financial stocks tend to fall with the stock market, and fall precipitously. This is driven by the fact that investment firms are generally net-long the stock market, meaning that if the broader stock market were to rally, financial institutions will benefit more from that than if the stock market were to fall. Generally speaking, it is safe to assume that a market rally will dramatically improve the amount of earnings investment banks will be able to report.

Conclusion

Investors in Morgan Stanley (NYSE:MS) are essentially making a bet on the economy. The bet is that the economy will recover quite substantially. If that were the case, (which I believe the economy will continue to grow) then it is a good opportunity to invest in Morgan Stanley.

The stock sports a fairly hefty valuation (36.5 P/E multiple). The high earnings multiple is justified by the 1,515% earnings growth analysts are anticipating for the current fiscal year. Morgan Stanley seems to be on the right track as it was able to grow earnings by over 900% year-over-year in the first quarter.

It is fair to assume further cost-cutting and continual revenue growth from improving fund inflows. Based on these assumptions, Morgan Stanley will be able to report a fairly strong year. If that is the case, then a 36.5 earnings multiple is quite cheap in respect to the high earnings growth. The stock is undervalued and it also offers a 0.97% dividend yield. Morgan Stanley is a worthy member of a value focused stock portfolio based on the high growth rates analysts estimate for the current fiscal year.

The article The Stock Market Determines the Earnings Potential of Banks originally appeared on Fool.com and is written by Alexander Cho.

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