My ‘Robber Baron’ Pick Is Up 25 Percent And Counting

Between 1835 and 1839 four men were born who forged America into the richest, most inventive and most productive country on the planet. Arguably, few other men in our history have had a greater impact.

These affluent industrialists were considered some of the wealthiest — and most successful — businessmen of the 19th and 20th centuries. Their rise to fame came during the Gilded Age, an era of rapid economic growth in the late 19th century.

I’m of course talking about steel tycoon Andrew Carnegie, oil titan John D. Rockefeller, financier J.P. Morgan and speculator Jay Gould. These men were known as robber barons for their shrewd, ruthlessly competitive and sometimes unethical business practices.

Despite this, they’re recognized as some of the greatest businessmen and investors the world’s ever known.

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Although the so-called “robber barons” were mostly known for their industrial empires (namely in the steel, oil and railroad business), not all of the robber barons left their legacies in the industrial business.

Not quite as famous as the other three, Jay Gould was just as business savvy. He made a name for himself by mastering the financial arena that was the early days of the stock and bond markets. He was a superb financial engineer who usually out-strategized his competitors… including J.P. Morgan early in his career.

But unlike Rockefeller, Carnegie and Gould — all individuals who accumulated their wealth from virtually nothing — J.P. Morgan was born into a wealthy elite banking family. Morgan’s father founded Aetna Insurance, known today simply as Aetna (NYSE: AET), and can count Aaron Burr and evangelist Jonathan Edwards among his relatives. And while he may not have had as tough an upbringing as the other three, he no less left a lasting imprint on the American economy.

And it’s his legacy that provided the backdrop for one of the most recent picks in my premium newsletter, Maximum Profit.

And, no, I’m not talking about JPMorgan Chase.

My Recent Pick Is Rebounding From The Financial Crisis
I’m actually referring to Morgan Stanley (NYSE: MS).

Morgan Stanley was spun out from J.P. Morgan in 1935 in response to the Glass-Steagall Act that required commercial and investment banking businesses to be separated. Today, it is one of the largest and most prominent global investment banks in the world. The company has institutional securities, wealth-management, and asset-management segments, as well as more than 50,000 employees.

#-ad_banner-#The financial sector hasn’t enjoyed the same stellar returns that many other industries have since the financial crisis of 2008. Low interest rates and tougher regulations, such as meeting capital requirements, have largely curbed the performance of this industry.

But those same two hindrances could help propel Morgan Stanley going forward…

After the financial crisis, regulators around the world began working on tighter rules to ensure the sustainability of global banks. The idea is that if another collapse happens, banks will have enough liquidity that they won’t need to be bailed out.

Each quarter banks must pass a battery of so-called stress tests to see how they would react to another economic meltdown. If they pass these tests and meet the minimum capital requirements, they still must get their capital plans approved by the Fed. The capital plans are essentially what the bank would like to do with their profits, i.e. repurchase shares and issue a dividend.

So you can see why this sector hasn’t seen much love in recent years. If the bank doesn’t pass the tests, their capital plans are put on hold, meaning shareholders aren’t being rewarded via share buybacks and dividend increases.

But the industry seems to have found its footing with all these tests and requirements… and some, like Morgan Stanley, have fared much better than their peers.

With a Tier ratio of over 15%, which is five percentage points higher than the minimum, Morgan Stanley has the highest capital ratio among its peers by far. This has made the investment giant a favorite among investors, in large part because the bank has the ability to reward shareholders. The bank plans to repurchase $3.5 billion of stock over a 12-month period that began in the third quarter of 2016, at which time it also raised its dividend to $0.20 per share from $0.15.

An Improving Interest Rate Environment
The other major hurdle for investment banks has been the low interest rate environment. But should the Fed raise rates in December, this would bring an immediate boost to Morgan Stanley’s net interest income.

We already know that the financial health of Morgan Stanley is strong, especially when compared to its peers, by looking at its Tier 1 capital ratio. But diving into its cash flow statement, one can see that the firm has really turned a corner.

In the last 12 months, the company has generated more than $28 billion in cash flow, which dwarfs the $13 billion loss in the preceding 12 months. This puts the company in the top five percent of all companies growing cash flow.

Up 25% And Counting
With potentially raising rates and with the Fed approving Morgan Stanley to deploy its excess capital, the firm could be just in the beginning of a tremendous run. So you could buy now and feel reasonably comfortable in expecting nice gains.

That said, my Maximum Profit readers and I added shares to our portfolio back in late October. And since then, we’re up over 25% on our position. Morgan Stanley was one of only two investment firms that had managed to pass my system’s strict criteria all year. This just goes to show how lucrative (and powerful) having a proven system working for you can be.

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