Investing in the stock market involves some risk, whether you like it or not. If you have $500 to invest in the stock market and don't want to worry too much about it losing value, there are probably a few things you should look for.
One, your investment should probably be in a large, stable company that is a market leader in its space. Two, the stock should be available at a relatively low valuation, with a clear path ahead to growth. Three, the company should have multiple revenue streams so that it can weather market ups and downs, should one of its revenue sources face volatility. Finally, the company should have liquidity, with cash available to navigate downturns and invest in its growth.
Morgan Stanley (MS 0.37%) is a company that ticks off these boxes and would make a good, safe place to park your $500 with a reasonable expectation of growth over the long term.
One of Wall Street's finest
When you think Morgan Stanley, you think Wall Street. This is a firm that's been around since 1935 and is synonymous with Wall Street and investment banking. It has pretty much been a market leader since its start -- in its first year, it handled $1.1 billion in public offerings and private placements and had a 24% market share. Currently, it is the third-largest investment bank behind Goldman Sachs and JPMorgan Chase in terms of revenue, but second in equity capital markets behind only Goldman Sachs.
It has gained market share this year and is coming off a strong third quarter, where investment banking revenue increased 67% year over year and the segment had its best quarter in history, driven by a record quarter in advisory revenue. And with a significant number of deals in the pipeline, this business should show continued strength in the near term.
Overall, Morgan Stanley saw net income jump 35% year over year to $3.7 billion. Also, revenue increased about 25% to $14.7 billion, with about half of that, $7.5 billion, coming from Institutional Securities, which includes its investment banking and institutional trading business. While this has been the cornerstone of the business, Morgan Stanley has taken steps in recent years to bolster its two other businesses -- Wealth Management and Investment Management -- and that has helped its revenue and earnings surge.
Acquisitions fuel growth
Morgan Stanley is not only one of the top two or three investment banks and trading firms in the country; it is the largest wealth management firm in the U.S. This is its financial advisor and brokerage business, and it has about $1.24 trillion in assets, the most in the U.S. and third globally behind UBS and Credit Suisse.
This business saw revenue increase 28% in the third quarter year over year to $5.9 billion. Morgan Stanley has long been among the leaders in this space as well, but its acquisition of online brokerage firm E*Trade last year gave it a huge boost, as CEO James Gorman explained on the third-quarter earnings call:
"The wealth management business, which includes E*Trade now, of course, is growing assets at levels far beyond what we've seen. Through the first nine months, this business added over 300 billion of net new assets, compounding growth on a client asset base of over 4.6 trillion, and we believe this is going to be an economic engine for Morgan Stanley for decades to come."
These two businesses have always dominated revenue share at Morgan Stanley, but another acquisition it made last year, of asset manager Eaton Vance, has bolstered its third business line, investment management. Just three years ago, investment management did $653 million in revenue in Q3. This past quarter it did $1.4 billion, which was up 36% from 2020's Q3 total. Three years ago, this segment accounted for 6.6% of overall revenue, this year it makes up about 10%.
The investments made in the wealth and investment management businesses were strategic moves to give Morgan Stanley a more balanced business, so that if M&A activity slows down or the trading business drops, it may be offset by gains in wealth or investment management, which are less volatile businesses. Also, Morgan Stanley is a pretty good value, with a price-to-earnings ratio of about 13, despite the fact that the stock price is up 52% year to date.
A good place to park your $500
Morgan Stanley is in good financial shape too, with a common equity tier 1 ratio of 16%, which is well above the required minimum of 13.2% set by the Federal Reserve.
Further, it has about $5.3 billion in cash, and its debt-to-equity ratio is about 2.2, which is lower than where it's been in the past 10 years, while its current debt ratio, the ability to pay off short-term debt, is higher than it has been in recent years. These are both good indicators, considering the firm made two big acquisitions.
Morgan Stanley has been a good investment for decades, averaging a 20.5% annualized return over the past decade. It remains a good investment and it is in perhaps even better shape now, given the recent acquisition moves it has made. This stock looks like a pretty good place to park your $500 -- which would buy you about five shares at its current $104 per-share price.