How Morgan Stanley Got Left Behind In The Rally

While the S&P 500 Index has recovered from its early February decline, many financial stocks have not joined in on the monster rally.

One issue that is trading much lower to its recent lows as opposed to its recent highs is Morgan Stanley MS.

The company, which posted upbeat Q4 profit on January 17, rallied to a four-year-high that day ($33.52).

It matched that high the following session, reaching $33.49, then abruptly reversed course prior to the broad markets decline a few weeks later. The ensuing decline took Morgan Stanley to $28.78, then rebounded to $30.55 over the next seven trading sessions.

But as the broad market continued to grind higher, Morgan Stanley drifted back to its recent lows, making lows under $29 in Wednesday's trading ($28.89) and Thursday's trading ($28.93). So far in Thursday's trading, it is firmly back in the $29 handle, changing hands at $29.10.

Since its earnings release, there has been minimal fundamental information on the wires to account for the decline after good numbers. Beside the announcement that the company will pay $1.25 billion to settle a case related to the sale of mortgage-back securities, the wires have been quiet.

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However, Morgan Stanley had been heading south before that revelation and actually traded higher over the next three days following the announcement. Perhaps the company's precautionary measure -- adding $1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigation -- helped lessen the negative impact on its share price.

Wall Street analysts have not commented on this issue after its earnings report and the announcement of its settlement with the FIFA. On January 15, Keefe, Bruyette & Woods assumed coverage of Morgan Stanley at a Market Perform and announced a $34 price target. The street high target resides with JMP Securities, who maintains a Market Outperform rating and recently raised its price target from $34.00 to $36.00.

Unfortunately for Morgan Stanley shareholders, the issue has been a laggard over both the long term and the short term. The issue, which made its all-time high in February 2000 ($91.31), declined from $75.50 in June 2007 to a financial crisis low of $6.71. Also, while the broad market was recovering over the next few years, Morgan Stanley could have been purchased at $12.50 as late as July 2012.

Perhaps the dilution of its stock by large capital infusions from the Federal Government during the financial crisis and by Mitsubishi in 2008 has been the culprit. The huge increase in the number of shares outstanding automatically make the shares less valuable, by reducing the stock's earning per share. Therefore, the issue may never return to the its elevated levels from 2000 and 2007.

From a technical perspective, Morgan Stanley offers a favorable risk reward at its current level ($29.32). If the long-term support ($28.00) can hold, risking roughly $1.00, the issue may recoup some losses from mid-January and revisit its recent highs in the $33 handle. Especially if the company has finally put behind its missteps from the financial crisis with its recent settlement with the FIFA.