Barron's Bullish On Morgan Stanley (MS) And Goldman Sachs (GS)

This weekend's Barron's had a bullish piece on both Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS). Barron's likes that Goldman and Morgan Stanley aren't burdened by consumer-debt and commercial-loan portfolios that are weighing on its competitors. Also, with competitors being acquired or closing up shop, MS and GS has been able to strengthen their relationships with institutional traders in the important bond, equity, commodity and foreign-exchange markets. A year ago, there were about a dozen financial heavyweights competing for U.S. debt, equity and business and now there may be just three large competitors: Goldman, Morgan Stanley and JPMorgan (NYSE: JPM).

Although, there are not as many competitors, things are still tough for the existing companies left in the finance business. Last month, Goldman's CFO David Viniar said, "Basically every company...every industrial company in every industry in every country in the world is doing badly."
Goldman's institutional and retail-client activity is down, formerly profitable areas like merger-advisory work and IPOs have also fallen off a cliff.

Goldman Sachs and Morgan Stanley is also benefiting from the cheap money the government has made available for them through the TARP. Investors realize that Goldman and Morgan Stanley may be two of the last few standing and amid the financial rally last week sent shares of Morgan Stanley up 48% and Goldman Sachs 30%, but Barron's thinks there is more to go.

Many now value financial companies based on shareholder equity, or book value. Morgan Stanley trades for 83% of its $30 book value and 92% of its tangible book value of $27. Goldman trades for 100% of book value of $98 and 1.1 times tangible book of $88.

Both Goldman and Morgan Stanley have reduced their balance sheets in late 2008, while boosting capital. Goldman's assets fell to $885 billion from more than $1 trillion in Q4 while Morgan Stanley's dropped to $658 billion from $987 billion.

"Key capital ratios, including tangible common equity and Tier 1, look good, relative to those of major banks, especially because Goldman and Morgan Stanley value almost all their assets at market prices each quarter, reducing the possibility of nasty surprises", according to Barrons.

Barron's says an investor could expect some additional upside this year, with Morgan Stanley topping $30 and Goldman hitting $110 or more.

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