What if two different companies aren't what they seem. What if they are much better than they used to be, more consistent, less risky, a lot cleaner, a lot less murky. What would it mean for their stocks?
It's pretty simple: a stock of a consistent secular grower is worth a heck of a lot more than one with episodic earnings that can run afoul of capital rules and even be shut down if things go truly awry.
You engineer that change you should find yourself running an operation that has a premium valuation not just to its one-time cohort -and I say one-time because its stripes have changed too much not to - but perhaps even the stock market itself.
Notice everything I have said, though, is what we call "in the conjunctive". It should be worth more, not it is worth more.
This morning Morgan Stanley reported and once again, as is almost always the case, the numbers, top and bottom line were sharply better than expected. You know what? I don't care. They mean nothing to me. What I care about is how they made them. Sure they had their usual remarkable equity and bond issuances, and mergers and acquisitions. But what I liked was the organic and inorganic growth from the wealth management business, helping people manage their money.
Having come from this business I can tell you that it's incredibly sticky through good and bad times. With the additions this month of Etrade and soon the addition of Eaton Vance, the company has doubled down on a business that I like very much. When the crisis hit in 2008-2009 most investment banks decided that with more risk controls they would be fine.
CEO James Gorman took a different approach. "For the past decade," he told me "We have done everything in our power to stabilize and de-risk Morgan Stanley but also invest in growth." He continues, "Between Wealth and Asset Management we will post the Etrade and Eaton Vance deals closing manage $4.4 trillion of clients' money which gives us unbelievable stability."
Of course the Morgan Stanley investment bank remains world class and, Gorman reminds "is firing on all cylinders."
There's only one problem. The market still thinks that the investment bank rules, and by nature, no matter how lucrative, it's toxic to investors because it is, indeed, sink or swim. Gorman says, "We hope investors will increasingly see the power of this combination of ballast and speed."
Unfortunately, I always say that "hope should not be part of the equation." Investors, judging by this quarter, where the stock barely moved, is not paying anywhere nearly enough for this franchise. The fact that it sells at about 9x earnings, is irrational and absurd.
How irrational is it? This stupid market would pay more for Morgan Stanley if it spun off the traditional business. As someone who applied and got an offer there I can tell you that's the last thing you would want to do. You want both businesses especially given how complementary and synergistic they are . The only solution? Wait until buyers understand the greatness. Or to put it another way, Morgan Stanley's stock is a gift and don't look it in the mouth.
Speaking of insane valuations, the stock of Goldman Sachs is the lowest of its entire sector, trading at about 8x forward earnings. I could say that's a disgrace, what are they doing over there. Or I could say, "It's a disgrace, what are investors thinking?" Like Morgan Stanley, Goldman has de-risked. It's picaresque mores are now behind them. It takes assets in, keeps them for a short term and then sells them. It advises the wealthiest of the wealthiest and still brings companies public and helps them. But there is almost nothing risky about it. We own the stock for my charitable trust, which you can follow along by joining the actionalertsplus.com club, because it finally looks once again like the incredibly consistent and lucrative firm I proudly worked at.
In short, the prices of the stocks of Morgan Stanley and Goldman Sachs are a travesty of a mockery of a sham and must be bought before everyone figures out what I just told you.