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

We maintain a database of quarterly 13F filings from hedge funds and other notable investors for a variety of purposes. One of our activities is the development of workable investing strategies, and we’ve actually discovered that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). We also like to evaluate large changes in hedge fund positions, and when going through the most recent filings we noticed that billionaire Louis Bacon’s Moore Global initiated a position of 4.5 million shares in Morgan Stanley (NYSE:MS) during Q1, making the bank one of its top ten picks overall (see Bacon’s stock picks). Morgan Stanley was also Caxton Associates’s second largest holding by market value following a large increase in the fund’s position; Caxton was founded by billionaire Bruce Kovner (find Caxton’s favorite stocks).


Morgan Stanley (NYSE:MS)’s stock price is up 89% in the last year, including 34% year to date and over 20% quarter to date. Decent earnings numbers from Q1 and the fourth quarter of 2012 (with numbers for that period coming in well above expectations) fueled these gains. Still, there is some value case remaining for Morgan Stanley (NYSE:MS); for one, it trades at a discount to the book value of its equity with a P/B ratio of 0.8.

The bank’s 10-Q for the first quarter of 2013 showed decent growth rates in revenue, notably from trading activities and from net interest tilting positive; overall, revenue was up 18% versus a year earlier. Non interest expenses were actually down in absolute terms, with a 5% drop in compensation and benefits in particular. As a result Morgan Stanley (NYSE:MS) earned 48 cents per share. The trailing P/E is high because of poor results in previous periods, but if we annualize these most recent results we get an earnings multiple of 13- meaning the company needs little improvement going forward in order to be considered a value play. Wall Street analysts expect $2.55 in EPS for 2014, placing the current price at only 10 times forward earnings estimates.