Morgan Stanley (MS) has had its struggles like all stocks in the financial sector. The company is not at the top of our long-term investment options for 2012, but when we see an opportunity to make money, we like to point it out. Morgan Stanley is in a perfect position to move up another 20% and we like this option play to capture a profit while it moves.
Morgan Stanley is a financial holding company providing various financial products and services to corporations, governments, financial institutions, and individuals worldwide. The company's Institutional Securities segment offers financial advisory services on mergers and acquisitions, divestitures, joint ventures, corporate restructurings, recapitalizations, spin-offs, exchange offers, leveraged buyouts, takeover defenses, and shareholder relations, as well as raising capital and corporate lending services. (from Yahoo Finance)
Last year, Morgan Stanley laid off 1600 employees and recently announced that more would be coming. The year 2012 will not look much different than the end of 2011 as downsizing will continue in the sector. As expected, the company did not fare well in the fourth quarter:
Revenue was down 26%
Institutional-securities are down 42%
No profits-- $227 million dollar loss
Settling the legal clash over bond insurer MBIA (MBI) was the culprit behind these losses.
The financial sector as a whole is not expecting any stellar breakouts in 2012 as the country attempts to climb its way out if its economic slump ever so slowly. As we look at Morgan Stanley, all signs appear to be pointing to more bullish growth. With a median price target of $23.00, Morgan Stanley has room to move. There are two specific things that we are seeing in the stock that makes us believe it will continue to grow.
Long-term increased Strength in Bullish Move
The long-term chart is showing an increase in the strength of the bullish move even as Morgan Stanley has built a foundation. This can be seen in from July 2011 through the present in the form of a positive divergence in the RSI indicator.
Reliable Reversal Pattern
The foundation Morgan Stanley has established in the long term chart is a very reliable double bottom reversal pattern. As a reversal pattern, it is very reliable. The stock has broken through upper resistance, appears to be taking a quick dip and has the ability to move up another 5 points to about the $24 level. We have resistance at $22 but stronger resistances at $24.
Click to enlarge:
The Option Play
Because we believe it is possible for the stock to move up, a short-term options strategy could be a good investment. If we were looking at creating something, we would want minimal risk and room for time decay in case it dips farther. A Bull Call Spread would work here. Here is the play we might look at:
Buy July 2012 '19' call option (priced at $1.90)
Sell July 2012 '20' call option (priced at $1.38)
Net Debit to start: $0.52
Maximum Profit: $0.48
Reasoning behind the Trade
This trade has a higher risk-reward ratio than we usually look for, but we like the position the stock is in. With increasing strength going into the bullish trend and the stock just getting ready to break out of a reliable reversal pattern, it is a good time to enter. Considering that the first real resistance Morgan Stanley faces is at $22, the move up through $19 and $20 should not come with too much difficulty.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.