Prudential: Small Investor Is Back

Among traders, Michael Driscoll, of Bear Stearns, says the fact that busted energy stocks, such as Calpine (CPN Quote), Dynegy (DYN Quote), Mirant (MIR Quote), El Paso (EP Quote), and Williams (WMB Quote) are all up sharply since March is evidence that the retail investor is back in the market.

"The small investor hasn't been able to say no to single digit stocks," said Driscoll, adding that volume has been high on other beaten-up names, such as Lucent (LU Quote) and Nortel (NT Quote).

Still, the experts are not yet ready to hail the dawn of a new bull market. "If this were a massive move, we would be churning record volumes. We would really see fireworks and explosive price action," said John Bollinger, president of Bollinger Capital. "There is no sign of that. This looks like a reasonable intermediate-term upswing within the context of a long-term flat market."

As for Trone, he lifted his 2003 earnings estimate for Merrill to $3.00 a share from $2.85 a share, and his 2004 estimate to $3.30 from $3.10 to reflect higher revenue in asset management and retail brokerage. The analyst upped his 2003 EPS estimate for Morgan Stanley to $3.05 a share from $2.95 a share and his 2004 estimate to $3.65 from $3.45, also based on higher revenue from retail investments.

Back in May, Trone downgraded Merrill Lynch to hold because of valuation and margin expansion concerns. "We continue to harbor [margin] concerns, but this surprisingly quick improvement in the retail investor activity could help somewhat," he said, adding that the firm would be most favored by improvement in higher-margin investment banking activities, which is not yet apparent.

Separately, the analyst said that the risks related to Morgan Stanley's aircraft leasing activity appear to be dissipating. In the second quarter, Morgan Stanley recorded a $287 million pretax impairment charge for that business. For there to be another charge of that size, conditions in the aircraft leasing market would have to sink below that of the March to May period, which included airline bankruptcies, panic over SARs, war in Iraq, and increased tension over terrorist attacks," said Trone.