What to make of the relative strength of Morgan Stanley?
The bank is set to report earnings on Wednesday, and on a day when the broader financials are off 11%, with CitigroupandBank of Americaoff a respective 19% and 24%, Morgan is hanging in there, down only 5%.
On Friday's show,Dan Nathan of Phoenix Partners Group(and a cable news sensation in the making) noted the strong technical pattern of Morgan's stock chart, observing that unlike other financials that have had meteoric rises of late, Morgan's stock has had a much more sustainable rally that has been punctuated by higher highs, and higher lows.
According to Nathan, the options market is pricing in a 22% move for the stock on earnings, which would be more than double the average 10% over the past 4 quarters. With that in mind if an investor feels like making a contrarian bullish bet in a financial, Nathan is recommending selling the May 17.5 Put for $0.55 and using that cash to purchase the May 26/28 call spread for $0.65. All told, you're paying .10 to make a bullish bet that could net you a gain of $1.90 if the stock closed above $28 on May expiration. Worst case scenario, you get long the stock at $17.50(or $17.60 when you factor in the cost of the trade), but that would be about 25% lower than where the stock closed, and much lower than what the options market is predicting.
Something to keep in mind, however. Earnings have not been kind to financials.. Wells Fargoaside, Citigroup, Bank of America and Goldman fell despite posting better than expected earnings, mostly on the heals of a favorable lending and trading revenues. But according to some industry observers, Morgan's Stanley trading revenue may not be as pronounced as its rivals.
Brad Hintz, the one time CFO of Lehman and equity analyst at Sanford C. Bernstein & Co. (Outperform), points out that Morgan's leverage ratio stands around 13:1, a steep decline from the 32:1 from a year ago. "Mack really pulled the reigns in on the risk these guys took on the balance sheet," Hintz said.
More tellingly Hintz pointed to the firms compensation ratio as an indication that perhaps the firm's revenue won't be as robust as many think.
"I talked to management recently and they indicated that their compensation ratios would be over 50%," Hintz said. "Typically, when that ratio exceeds 50%, it's a sign revenues may not be so strong."
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