Goldman Sachs & Morgan Stanley Dual Upgrade Alert

• Morgan Stanley MS shares have plummeted 13 percent in the past one month, while Goldman Sachs Group Inc GS shares have lost 9 percent.
• Evercore ISI’s Glenn Schorr upgraded the ratings on both the companies from Hold to Buy.
• Schorr said that the valuations of both the companies look more attractive following the recent market pullback.

Analyst Glenn Schorr said that Q3 could be a challenging quarter, in view of the downturn in global equity markets, wider credit spreads, lower oil prices and seasonality in underwriting. He added, however, “[W]e like the brokers ahead of what is typically a strong 4Q (led by a +20% pick up in I-Banking) and 1Q (historically a 40% lift in trading volumes).”

Although September has been historically sluggish over the past 10 years, Morgan Stanley and Goldman Sachs have performed really well in both October and December. Moreover, both the companies have achieved expense control; and capital returns should “steadily improve from here.”

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Goldman Sachs: Over-Accrual Bodes Well for 2H15

Evercore ISI noted, “While its business model has certainly been challenged by the new regulatory landscape and de-levered environment, GS has focused on producing superior returns while also preserving its optionality to set the stage for better returns and growth.”

Schorr added that Goldman Sachs’ revenues in the first half of the year were “well ahead of pace,” and the company has over-accrued comps, which provide “huge support” for returns in the back half. The analyst has a price target of $215 for the company.

Morgan Stanley: Good Story, Valuation Better

“The multi-year transformation to a more stable mix of business/earnings has played out well and we now think that earnings consistency, B/S strength and MS’s ongoing strategic initiatives have helped investors believe in the ~10% ROE (adjusted) for 1H15 as a sign that investors will actually be rewarded for their patience,” the report said.

At the current valuation, Morgan Stanley’s stock is “compelling,” Schorr commented. The analyst has a price target of $41 for the company.