NEW YORK (TheStreet) -- Fluctuations in oil prices, currency swings, Fed policy shifts, geopolitics and other factors weigh heavily on stocks of large financial firms. Figuring which to buy and sell -- and when -- can be tricky. Despite the uncertainty, there are plenty of large U.S. banks suitable for long-term investment, according to a new report from Morgan Stanley (MS).
The company's analysts identified "high-quality companies likely to strengthen and extend a sustainable competitive advantage," for its a "30 for 2018" list, identifying stocks for long-term investment.
The analysts put forth their best investment ideas "in their sectors at times of market dislocations or uncertainty." The stocks are considered suitable for holding for a three-year time period, according to the report, issued Thursday.
"Our driving principle was to create a list of companies whose business models and market positions would be increasingly differentiated by 2016," the report said.
Morgan Stanley's top investment ideas for financial services industry are names that, for the most part, investors have heard before. But they're worth checking out anyway.
"The main criterion is sustainability -- of competitive advantage, business model, pricing power, cost efficiency, and growth. We selected the companies that scored best on these criteria," the report said. The analysts also took into account capital structure, shareholder remuneration, as well as environmental, social and governance principles, which can "shed light on a management team's approach to sustainable and responsible governance over the very long term."
When you're done be sure to check out the investment bank's consumer sector investment ideas. We paired Morgan Stanley's views with ratings from TheStreet Ratings for comparison.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Note: Year-to-date returns are based on May 18, 2015 closing prices.BAC data by YCharts
1. Bank of America (BAC)
Market Cap: $173.4 billion
Year-to-date return: -7.7%
Morgan Stanley Rating/Price Target: Overweight/$20 PT
Morgan Stanley said: We believe Bank of America will outperform peers over the next 3 years as expense management, rising rates, and higher capital return together drive a 15% EPS CAGR 2015-18e. Expense declines are the primary reason to own BAC, we believe. We expect Legacy Asset Servicing (LAS) costs to decline from the current $1 billion quarterly run-rate to $0.6B by 4Q16 en route to below $0.5B in 2017 as BAC works out pre-crisis delinquent loans. Outside of LAS, we expect BAC to improve efficiency through lower comp ratios, increased automation, and more branch consolidation. BAC's comp / revenue ratio of 40% in 2014 was highest among both money centers and super-regionals (median 34% at peers), and we see room for BAC to bring this down, particularly in the investment bank. To be clear, management has not said they are planning to lower comp ratios, only that they will manage expenses to grow slower than revenues. Our view is that BAC will hold the core expense CAGR at 3% over the next 3 years while driving a 5% core revenue CAGR by paying out less on incremental revenues, as their investment banking peers have been doing.
Among the biggest beneficiaries of rising rates. BAC sources 52% of its deposits from consumers, above the peer median of 35%; has 47% of its loans tied to front-end floating rates (peers 41%); and has been marking its bond portfolio through its Net Interest Income line due to FAS 91, setting up for a sharp rise in NII as short and long term rates rise.
TheStreet Ratings: Buy, B+
TheStreet Ratings said: "We rate BANK OF AMERICA CORP (BAC) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, expanding profit margins, increase in stock price during the past year and growth in earnings per share. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Commercial Banks industry. The net income increased by 1316.3% when compared to the same quarter one year prior, rising from -$276.00 million to $3,357.00 million.
- The gross profit margin for BANK OF AMERICA CORP is currently very high, coming in at 86.18%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, BAC's net profit margin of 14.15% significantly trails the industry average.
- Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
- BANK OF AMERICA CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, BANK OF AMERICA CORP reported lower earnings of $0.35 versus $0.91 in the prior year. This year, the market expects an improvement in earnings ($1.33 versus $0.35).
- BAC, with its decline in revenue, slightly underperformed the industry average of 0.8%. Since the same quarter one year prior, revenues slightly dropped by 6.7%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- You can view the full analysis from the report here: BAC Ratings Report