Analysis: MS ELV GS JPM BAC BMO

After you receive this Alert, we will make the following trades:

-- Sell the remaining 500 shares of Morgan Stanley (MS)  in the Action Alerts PLUS portfolio at or near $88 a share. This will close out the portfolio's position in MS, which returned -4.9% since being added to AAP in 2021 (latest purchase).

-- Initiate a position in Elevance Health (ELV)  , buying 90 shares at or near $472 share. Following this trade, ELV shares will account for 1.20% of the portfolio.

Exiting Morgan Stanley 

We are exiting our position in Three-rated Morgan Stanley given the mounting concern over the company's prospects for its investment banking business in the coming quarters. We've previously indicated we would look to punt the shares near $91, however, in recent days there has been a flurry of chatter over layoffs at investment banking firms ranging from Goldman Sachs (GS) and JPMorgan Chase (JPM) to Bank of America (BAC) . As we shared in last Friday's Roundup, BMO Capital Markets, the Bank of Montreal's (BMO) capital-markets business, is making a series of job cuts as the unit gets stung from worsening market conditions, and this further supports our rationale in making this move with MS.

The catalyst is the continued weakness in investment banking as the number of IPOs in the first half of 2022 fell by 73%, and the capital raised is down 95%, according to data published by EY. So far in the current quarter, we haven't seen any meaningful rebound in IPO activity. With the economy expected to slow further and investment firms starting to trim back expectations for GDP in 2023, not to mention the year-to-date performance in the overall stock market, the rut in the IPO market is likely to continue.

We've started to see 2022 and 2023 EPS expectations for Morgan Stanley come down in recent weeks but even so current estimates still call for EPS growth of 16% in 2023 to $153.72. That consensus forecast projects for EPS of $1.54 in the current quarter, rising to $1.63 in the December quarter and $1.96 in the March 2023 quarter, per data published by Refinitiv. Absent a sharp rebound in the IPO market, the probability that those EPS estimates will need to come down is rather high, and when that happens, we could see further downside pressure in MS shares. We would much rather move out of this small position in MS, and into something with far better prospects.

As we've communicated before, when both the investment management and investment banking businesses are firing on all cylinders at Morgan Stanley, there is meaningful financial leverage to be had. So, we'll place MS in the Bullpen and look to revisit the name on signs the IPO market window is starting to re-open.

Starting a Position in Elevance Health

You might not recognize the name Elevance but under its prior names you probably would. Early this year the company, formerly known as Anthem (and prior to that Wellpoint), changed its name to recognize the words "elevate and advance." The company is still in the same business, and one of the finest HMO businesses in the world. The company posted robust sales and earnings in July, beating estimates, but due to weak market conditions the stock failed to rally at that time. We like the business as an ideal "anti-inflation" play while offering a sturdy cash flow stream during slowing economic times. Everyone needs "insurance" and we believe Elevance is best in class.

The technicals for the company are also compelling. After a nice surge in the spring, the stock has come back to Earth and is now range-bound. We like adding to a stock on a pullback, and we see that has happened with this stock. Elevance is sitting in a virtual "no mans' land," which is a good spot to start a new position. The stock's 200-day moving average has acted as strong support over the past few months, and recently. We like  ELV shares to rise up past the old highs from April but more importantly to provide some protection against a market that is shaky at best.

We'll start Elevance with a two rating and a price target of $550.

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)