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Summary

  • I sold out of Concho Resources because I had a quick gain in the stock and I was too "oily" in my growth portfolio.
  • Morgan Stanley is a growth stock in the financial sector which also pays a dividend and is a value play.
  • I believe Morgan Stanley has a strong floor of support at $33.

I recently sold Concho Resources, Inc. (NYSE:CXO) from my growth portfolio because I felt that I was too "oily" at the time in the portfolio and I wanted to add shares of a financial growth stock. After locking in some profits, I decided I wanted to add a bit of a dividend to the portfolio so I added shares of Morgan Stanley (NYSE:MS) to the portfolio. Morgan Stanley is a financial services firm that, through its subsidiaries and affiliates, provides its products and services to a diversified group of clients and customers, including corporations, governments, financial institutions and individuals. On July 17, 2014, Morgan Stanley reported second quarter earnings of $0.91 per share, which beat the consensus of analysts' estimates by $0.35. In the past year, the company's stock is up 20% excluding dividends (up 20.66% including dividends) and is beating the S&P 500 (NYSEARCA:SPY), which has gained 16.94% in the same time frame. I initiated my position in Morgan Stanley on June 3, 2014 and am up 8.27% on my position.

I sold my shares in Concho because it actually dropped out of my growth portfolio screening criteria for the basic materials sector. Concho Resources Inc. is an oil and natural gas company, which is engaged in the acquisition, development, exploitation and exploration of producing oil and natural gas properties. It operates in the Delaware Basin. On May 12, 2014, the company reported first quarter earnings of $1.01 per share, which beat the consensus of analysts' estimates by $0.04. In the past year, the company's stock is up 68.11% and is beating the S&P 500, which has gained 16.94% in the same time frame. With all this in mind, I'd like to take a moment to evaluate both stocks on a fundamental, financial, and technical basis to show why I swapped out of one for the other.

Concho Resources, Inc.

The company currently trades at a trailing 12-month P/E ratio of 49.28, which is expensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 25.49 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (1.68), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 29.27%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 29.27%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 21.39%.

On a financial basis, the things I look for are the dividend payouts, return on assets, equity, and investment. The company does not sport a dividend to speak of, but is sporting return on assets, equity, and investment values of 3.5%, 9.1%, and 6.3%, respectively, which are all respectable values. In this particular instance, I skipped the dividend aspect of the financials because the stock is in my growth portfolio, and in the growth portfolio, a stock does not have to have a dividend.

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 56.47. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line, with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($146.37), I'm looking at $150.08 to act as resistance and the 50-day simple moving average (currently $139.06) to act as support, for a risk/reward ratio which plays out to be -5% to 2.53%.

Morgan Stanley

The company currently trades at a trailing 12-month P/E ratio of 15.68, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 11.59 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.87 per share and I'd consider the stock inexpensive until about $43. The 1-year PEG ratio (0.77), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 20.25%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 20.25%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 24.8%.

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 1.2% with a payout ratio of 19% of trailing 12-month earnings while sporting return on assets, equity and investment values of 0.5%, 6.7% and 1.1%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 1.2% yield of this company alone is good enough for me to take shelter in for the time being.

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock is near overbought territory, with a current value of 62.71. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line, with the divergence bars flattening in height, indicating the bullish momentum may be getting tired. As for the stock price itself ($33.24), I'm looking at $34.27 to act as resistance and the 20-day simple moving average (currently $32.36) to act as support, for a risk/reward ratio which plays out to be -2.65% to 3.1%.

Wrap Up

I sold Concho for a 12.01% gain or 89.08% on an annualized basis. Again, I only sold Concho because it dropped out of my screening criteria for growth stocks in the basic materials sector. About a couple of weeks ago I increased my criteria for earnings growth in the sector because I wanted to narrow my search. Concho is a very excellent company with great near-term earnings growth expectations but it seems to me to be fairly valued on those growth expectations. Not to mention, I believe the stock to be fairly valued on 2015 earnings estimates and I also don't like the current risk/reward ratio.

Morgan Stanley on the other hand is not only a growth stock, but it is also a value stock which pays a dividend. The stock had a major ceiling of resistance at $33 and since it broke above that value recently on large volume I believe that $33 will act as a floor of support. This can only mean that I believe Morgan Stanley is going to move to the up side. However, if the market begins to falter in a big way, this stock won't be immune to a drop in price.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Morgan Stanley Is At A Strong Support Level Right Now