Morgan Stanley's (NYSE:MS) stock struggled for the better part of 2020, along with many of its peers in the financial sector. But it has been a different story the past few months, with the stock up 56% since late October.

This stellar performance is thanks to a few factors. Key acquisitions, the Fed's lifting of limitations on share repurchases, and a broader market rotation out of growth stocks and into value stocks have all played a role in lifting Morgan Stanley's stock.

The sudden rise may have investors wondering: Will the good times keep rolling for Morgan Stanley in 2021?

An investment bank.

Image source: Getty Images.

What's driving the share prices higher?

While financials underperformed the market for much of 2020, they have been in a much stronger position in recent months, as seen by the Financial Select Sector SPDR ETF, which is up nearly 29% since late October. During this time, a large rotation out of growth stocks and into value stocks has helped lift sectors like financials and energy. This rotation was a tailwind for Morgan Stanley, which had been greatly discounted last year, to the point where CEO James Gorman questioned the valuation of the company.

Morgan Stanley saw its stock price surge from less than $48 on Oct. 28 to nearly $75 as of Friday's market close, gaining 56% during that period. This made it one of the best stocks in the financial sector during that time, up there with competitors Goldman Sachs and Charles Schwab, which gained 52% and 53%, respectively.

Investors are optimistic about the company as it continues the process of integrating E*trade and Eaton Vance in the coming years. The company spent $20 billion on these acquisitions in 2020 in an effort to fill gaps and offer complementary services to its clients through its electronic trading platform. The merger with E*Trade was finalized in October, and the merger with Eaton Vance is expected to be completed in the second quarter of 2021.

As the company integrates these acquisitions, investors can expect a boost to the top and bottom lines in the coming months and years. Management has projected that the acquisitions will help the company generate 58% of its pre-tax profits from wealth and asset management on a pro forma basis. This will help it continue its expansion of those segments, which accounted for just 26% of its profits 10 years ago.  

In addition, in December the board of directors approved a $10 billion share buyback program after the Federal Reserve eased restrictions imposed on banks during the coronavirus pandemic. The lifting of this share repurchase moratorium will be another tailwind to support the company's share price.

Another stellar earnings period

Morgan Stanley announced its fourth-quarter earnings on Jan. 20, and they blew analyst estimates out of the water. While earnings per share (EPS) were expected to come in at $1.29 and revenue was targeted for $11.3 billion, the investment bank easily topped both, posting EPS of $1.81 on revenue of $13.6 billion.  This represents a growth of 26% for EPS and 39% for revenue from the same quarter last year, and was driven by growth across various segments, including investment banking, fixed income trading, and wealth management.

Revenue for wealth management was up 24% to $5.68 billion, a great sign for a bank that has made a concerted effort to expand in this segment. Year over year, the investment bank saw revenue grow 16% while EPS grew 24%, despite the challenges posed by the global pandemic.

What's next?

The financial sector is expected to benefit as economic activity picks up in 2021 and 2022. According to a report by Credit Suisse, improving credit conditions and higher interest rates will be positives for the sector as a whole. For this reason, Credit Suisse's research team believes that financial stocks are good value plays.  

With a cheap valuation, Morgan Stanley is well positioned. Although the stock isn't quite the bargain it was back in November, the company still has a price-to-earnings (P/E) ratio of 11.5, which is below Schwab at 27.6 and a hair under Goldman Sachs, at 11.7.

Positive developments in the economy, improving credit conditions, and an overall return to normalcy will help boost financial stocks. Morgan Stanley will benefit from these tailwinds while expanding its offerings and growing its bottom line, making this one stock to have in your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.