(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Morgan Stanley's (MS) stock has fallen by more than 18% from its March highs, finding itself down by more than 8% on the year. The stock is underperforming the S&P 500, which has risen by more than 8%. Technical analysis suggests things may get a lot worse for the investment bank. The stock may fall by more than 8% from its current price of approximately $48.05. Should that happen the stock would be down more than 22% from its highs.
Options traders are bearish on the bank, and see shares falling by more than 5% by the start of next year. The negative sentiment in the stock comes as earnings and revenue growth are forecast to see a significant slowdown next year. (For more, see also: Morgan Stanley Gets Cautious on Chip Stocks.)
Weak Technical Chart
The chart shows the stock nearing technical support at $47.25. It also shows a long-term downtrend which has been in place since the March highs. The stock failed to break free of that downtrend several times, recently failing at the beginning of September. If the stock falls below support at $47.20, it could fall as low as $44.10 a drop of more than 8%.
Options traders see the stock falling too, using the options set to expire on January 18. This is where the number of bets favors the stock falling, outweighing the number of bets shares rise. The number of open put contracts stands at more than 10,000. That is almost five times greater than the number of open calls. For the buyer of the puts to earn a profit the stock would need to fall to approximately $45.50 from the current price. (For more, see also: Top 4 Mutual Fund Holders of Morgan Stanley.)
The earnings outlook may be one reason for the bearish views. Earnings growth is forecast to slow in 2019. Forecasts expect profits to grow by 36% in 2018 to $4.90 per share. Forecasts predict further that growth then slows to 5% in 2019 and 7% in 2020. But with the 2019 earnings multiple currently at 9.4, one is paying almost double the company's 2019 earnings growth rate, giving the stock a PEG ratio of 1.9. Even worse is that the stock is not even cheap when compared to its historical P/E range of 6 to 14 since 2015.
Revenue growth is also forecast to be anemic. Current forecasts have revenue growing by more than 9% this year to $41.4 billion. But that slows to 2% in 2019 and then only 1% in 2020.
Despite the appearance of a cheap stock, the market suggests shares continue to drop as growth prepares to slow for next year and beyond.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.