What do people want out of a stock? Some want excitement, the thrill seekers, especially those who use options to speculate on stocks. Some view stocks as zero-sum, a whole cohort of ill-advised people who view stocks as zero-sum games and seem to care as much about their winning as you losing. They view stocks that go higher as sticking it to the man, not that we even know who the man is, although I often find out that it’s me.
I’ll tell you what I want. I want boring. That’s right, no surprises, no craziness, no win-lose, just boring.
It’s not an easy objective. This morning Oppenheimer downgraded the stock of Morgan Stanley (MS) , one of my favorite companies, in a piece entitled “Boring but Lucrative, Downgrading Morgan Stanley as It Nears Price Target.”
Now the piece itself doesn’t denigrate Morgan Stanley for its lack of action or pizzazz and instead focuses on the run that it has had, which has been magnificent, up 45%. It gives the bank praise for credit quality improvement and good merger-and-acquisition success.
But what the piece doesn’t get is that the banking business has long been a total roller coaster. You have great quarters and bad quarters. You have episodic gains as Goldman Sachs (GS) has. You have horrendous fines and penalties the way Wells Fargo (WFC) has. You have government intervention and you have tons of metrics that can trip up a bank, particularly an investment bank.
And then you have Morgan Stanley.
Eleven years ago, James Gorman took over Morgan Stanley, one of the more tremendous of roller coasters, one of those Great American Scream Machines, and turned it into a prosaic bank that stopped getting in trouble and started making great money.
It wasn’t easy. He was in some tricky lines of business. For example, in 2014, the firm was ordered to pay $625 million each to Fannie Mae and Freddie Mac. The settlement addressed claims alleging violations of federal and state securities and common law fraud between 2005 and 2007, not Gorman’s time. These days though, the company is more in the news for buying companies like Eaton Vance and E-trade to boost its wealth management business, a terrific almost annuity stream of sticky, non-episodic earnings.
Why is this so important?
Because this bank doesn’t trade that much differently from all of the others, with a similar price-to-earnings ratio despite its, well, boring-ness. A no-surprise bank is worth a heck of a lot more money than one full of surprises and people should have to pay a lot more for its stock than it does for its former cohort. The fact that it doesn’t is what allows it to shine and trade at a much higher valuation.
Each industry I follow has a boring stock I like. Not much is more boring than Johnson & Johnson (JNJ) with a triple AAA balance and tremendous growth products. There’s no flies on Procter & Gamble (PG) , it just keep incessantly delivering. Microsoft is (MSFT) a boy scout with consistently good numbers. Few companies are more boring than American Electric Power (AEP) . Maybe that’s why I like it so much.
Again, I want the excitement kept to the stadium. I want cheering and rooting to be saved for the home team. I look for companies that don’t surprise except to the upside on earnings and otherwise put you to sleep every night with their lack of anything that you need to suddenly worry about.