Citigroup Analyst Raises Rating on Morgan Stanley to Buy

Citigroup

Fundamental analysts tend to miss a lot when they analyze stock plays, but they don’t usually get it all wrong. The idea of entering Morgan Stanley right now is just brutal.

Whether Morgan Stanley deserves to be called a buy at some point down the road, it certainly isn’t now. We’d actually have a hard time finding a stock less worthy of entering on the long side outside of airlines and the oil industry. The third industry that is taking a beating these days is bank stocks, and Morgan Stanley has not just one or two but three good reasons to stay well clear of right now.

If you are a fundamental analyst though, your eyes are on what you think it is worth, in your own opinion, versus what the market is valuing it at. When a stock drops as much as Morgan Stanley has lately, this can serve to get you excited, especially if you think that it was worth the money prior to the dip and is all the more so now.

Citigroup analyst Keith Horowitz just upgraded Morgan Stanley to a buy with a price target of $57. He remarked that “clearly, there is near term uncertainty, but we believe investors with a longer- term horizon should use this opportunity to be building positions in MS.”

We can’t just call what is going on “near term uncertainty” when the probability of it declining further from here is certainly higher than it going up right now. Whether or not Morgan Stanley is a good long-term play or not, it certainly does not make sense to chase it down, which is what we would be doing here.

A lot of stocks have been beaten down over the last few weeks, as the market continues to panic over the threat of COVID-19. The market is afraid of a lot of things, where we typically get the news on something, sell off too much, and then reassess and rebound, but the news and hype in this case is ongoing, where the market continues to be more and more scared as more cases develop.

Even as the number of worldwide cases approach 100,000, if you have no idea of the incidence of various infectious diseases, that certainly might scare you. This is still less than half the number of people who get leprosy every year. Leprosy is considered to be an extremely rare disease, even though we do get these 200,000 cases on average, because there are 7.8 billion people in the world, where only about 1 in 40,000 people get this.

Leprosy is a serious condition, whereas with COVID-19, those under the age of 60 simply get influenza symptoms for a few days, and it is those over 80 that are at real risk. At an advanced age, where the body’s immune system becomes seriously compromised, this can hasten the end of one’s life, in the same way as other more common viruses can, like influenza or even the common cold. People this old will often catch a cold or other common virus and develop pneumonia or other lung conditions which end up being terminal due to their weakened state.

None of the fears about the coronavirus are rational, but rationality is in short enough supply normally and especially when the masses give in to irrational fears like this. People are even afraid to take domestic flights even though the chance of your contracting this virus on a flight is no more likely than being in any other public place. There’s something about planes that gets people particularly off their rocker though.

Stocks in general have been taken down by this virus lately, and this situation will continue to play out for a little while anyway, with the number of cases expected to continue to grow outside China. China stalled in the 80,000 area, with only a few stragglers added each day now, but the number of other cases has now grown to be more competitive at over 17,000 now.

We’ve long passed the point where common sense is going to weigh in on this, and the only way that these fears will go away is when we get to where China is now, with the show virtually coming to an end. This is starting to happen already to some degree, but nowhere near enough to compete with the drum beating by the media, who have stirred up the masses into a frenzy over all this, including the stock market.

Morgan Stanley Is in Free Fall Right Now, and No One Knows When This Will End

Morgan Stanley was trading around the $57 area that Horowitz has as his new target for the stock, back on February 19, the day before things really started to break down with stocks. We seriously wonder how these analysts claim to speak to long-term investors but use such a short-term timeframe, unless he means to suggest that Morgan Stanley will be up to $57 years from now.

These analysts really don’t look at the long-term much at all, and instead are seeking to advise investors on the short-term, 6 months to a year out typically. It is not that there is anything wrong with this, and this may be appropriate for some investors at least who are either getting ready to get out or are the sort that time their positions this closely, but if you are going to advise in the short-term, you need to pay attention to the short-term.

Advising someone to buy any stock in these troubled times is unwise in itself, but there’s more wrong with this pick than just the market risk. Market risk is in itself a big deal though, and one that investors don’t really pay much attention to, and when they do, they get it backwards and think that buying a stock that is declining is somehow a good deal.

This is exactly the thinking of Horowitz, who saw it decline from $56.43 two weeks ago to $45.24 on Wednesday and decided that it has become cheap enough. Cheapness is a relative thing though, and it became even cheaper the next day, on Thursday, dropping another 6% to $42.59. Being down 6% after only one day of owning a stock is not a good start at all, and in this case, utterly reckless.

We can get a sense of how much the coronavirus selloff has affected Morgan Stanley by looking at how much it rose on the two up days we had this week. The stock rose considerably less than the market did, which clearly illustrates that there is more going on with this stock than just the virus scare, although of course there is, because it’s a bank stock.

When you see bond rates plummet like they have, people become particularly worried about bank stocks, and when you throw in a half point emergency rate cut by the Fed, with presumably more of this on the way, this causes the market to particularly not love this sector. The current situation is the worst time to buy bank stocks since the financial crisis, without a doubt.

Morgan Stanley isn’t just your typical bank stock right now, due to their takeover of E*Trade. Deals like this hurt the acquiring company’s stock at the best of times, but this one is particularly seen as unwelcome by the Street. There are some good reasons behind this, as this will hurt Morgan Stanley for at least the next few years.

Wells Fargo analyst Mike Mayo has called this deal “value destroying” for Morgan Stanley, and he believes that the deal won’t serve to boost earnings until 2023. Given how much earnings growth matters to the stock market, if you are planning on being in it from now until then, you should not expect much market love, and certainly a below average amount. We need to be in stocks that the market likes, not ones they don’t.

We now have a trifecta of reasons not to buy Morgan Stanley here, and perhaps not for a long time, no matter what happens to the broader market. Stocks will rebound from this selloff, and Morgan Stanley probably will as well, given that this is one of the factors behind their losing a full 25% over the last two weeks, but they very likely won’t rebound anywhere near as much as your average stock. That’s a very convincing reason in itself to be in something else.

There Are No Good Reasons to Buy This Stock Here, and Plenty of Reasons Not To

Given that Morgan Stanley has a couple of other millstones around their neck, it just does not make sense to play a rebound with it versus doing this with other stocks, even other bank stocks. It’s better to avoid bank stocks entirely though and go with stocks that were bullish before this, where the resumption of their prior bullishness will make them more bullish going forward.

If someone really was that sold on Morgan Stanley for whatever reason, they at least need to wait for the bleeding to stop, and that doesn’t mean eking out a little gain when the market goes up more, just to give it back the next day. This is obviously not a stable time to be entering positions, and while the opportunity for a rebound is there, the risk is simply too high now.

Managing risk does matter with stocks in spite of how clueless investors in general are to this, thinking that a long-term view provides some sort of indemnity against it. If Morgan Stanley goes down another 6% from here until it bottoms out, and it could go down even more than this, we should feel silly doing what traders call catching a falling knife by trying to buy while a stock is seriously declining like this. These blades do cut, and 6% worth of blood has already been lost with this recommendation, and it’s only been one day.

It is not enough for a stock to look fine long term, and there’s no reason to think that this stock won’t be fine 20 years from now. We need to decide whether it will be fine right now as well, and if things are decidedly negative like they are with this stock right now, it is never sensible to choose a time like this to enter it.

To add to all this trouble, while the stock market in itself is subject to some pretty serious political risks, bank stocks are particularly prone to this. Banks really take a blow in recessionary times, and we may be just one presidential election away from this. The odds are clearly against us, even if Joe Biden ends up being the guy.

As moderate as he may be, he’s planning moves that are unfavorable for stocks and the economy at a time where we simply cannot bear this, and this could turn our very modest but stable growth rates right now into something ugly.

With the Fed using its cuts on the coronavirus, there will be little if anything left in the tank to fight a real economic contraction, and simply repealing Trump’s tax cuts may even be enough in itself if the Fed does not have the means to act to try to counter it. If Trump loses, these cuts go out the door with him.

A little further out, there’s also the specter of rate hikes, and when you put the rate down this low, or lower, rate hikes are inevitable. Given that rate hikes contract the economy, and with bank stocks being particularly sensitive to this, this also spells trouble for Morgan Stanley. Banks remaining nicely profitable doesn’t even protect against this, as we saw in 2018 where banks had record profits but their stocks got spanked due to rate hikes. When we hike, the default rate also goes up, and banks bear the pain of this like nothing else.

There are a lot of bad calls made by analysts, but this one really stands out as being terrible on all fronts. Deciding to buy a stock usually involves weighing the pros and cons, and if the pros come out ahead, the decision can make sense, but not if all you have is the cons, and lots of big ones.

Given how volatile the market is right now, it’s not even wise to short Morgan Stanley, although if we had to choose what side to be on, the bears are well in control with this one. When we’re moving several percent each day in both directions, and with the VIX so high, unless you have the skills of a seasoned trader, this is no time for investors to be looking to enter positions due to their inability to manage the much greater risk that is out there right now.

This current selloff will end, but we cannot just look at the amount of a decline and think that this in itself makes a stock more worthy to buy, and especially need to pay attention to whatever else may be going on with a stock besides being in the grasp of a pandemic of fear. A lot of money has been made by traders during this decline, but it takes a keen mind and a sharp eye to do it.

We’re not sure what to call Horowitz’ recommendation, but it would be the opposite of this, requiring a dull mind and two blind eyes perhaps. It is simply amazing how some of these analysts keep their jobs, and the only reasonable explanation is that the people that they report to, as well as their clients, do not have much of a clue either. We should never allow people like this to guide us and always need to be willing to think a little for ourselves. Even a little thinking exposes this horrible call for what it is.

Monica

Editor, MarketReview.com

Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: monica@marketreview.com

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