What Do Billionaires Kovner and Bacon See In Morgan Stanley (MS)?

Of course, a low P/B ratio and low forward P/E aren’t out of the ordinary for banks in the current environment. Citigroup Inc. (NYSE:C) and Bank of America Corp (NYSE:BAC) are similar to Morgan Stanley (NYSE:MS) in that they are recovering from periods of low earnings in their businesses, with analyst expectations implying forward P/Es of 9 and 10 respectively at those stocks. Revenue was up 10-15% at each of these banks last quarter compared to the first quarter of 2012, with large percentage increases in earnings. In addition, these two peers also trade below book value: in Citi’s case the discount is about the same size as it is at Morgan, while markets are even more skeptical of Bank of America’s assets (specifically, its P/B ratio is 0.7). We can also compare Morgan Stanley to JPMorgan Chase & Co. (NYSE:JPM). Recent business conditions have been better here, as the stock trades at 9 times earnings whether we consider trailing numbers or projections for 2014. With net income up nicely as well, and with any potential concerns about the departure of CEO Jamie Dimon likely avoided for now, JPMorgan Chase seems like an alternative which is slightly less dependent on future improvements than the other two megabanks.

The closest peer for Morgan Stanley in terms of business structure is probably pure-play investment bank Goldman Sachs Group, Inc. (NYSE:GS), however. Goldman’s trailing P/E is 11, which places it at a discount to Morgan Stanley (NYSE:MS) even if we annualize that bank’s Q1. While this might make us a bit more comfortable thinking of Goldman as a potential value investment, in its most recent quarter there was little change in revenue compared to the same period in the previous year.

At this point JPMorgan Chase seems like the most attractive large bank to us, given that it is already generating enough earnings to make its stock price look attractive as well as seeing improvements in its business. As far as the two large pure-play investment banks are concerned, however, it’s a tougher call as Morgan Stanley (NYSE:MS) has certainly turned in a promising quarter. It might be worth watching to see if it continues to experience higher growth than Goldman.

Disclosure: I own no shares of any stocks mentioned in this article.