NEW YORK (Reuters) - Morgan Stanley surprised Wall Street with its better-than-expected earnings on Thursday, providing a sharp contrast to its rival, Goldman Sachs, which rattled investors with a 53 percent profit drop earlier this week.
The question: With such divergent performances in bank earnings, what's the best way to play bank stocks?
BUY GOLDMAN SACHS
Some investors see Goldman's decline as an ideal opportunity to buy the stock.
"If Goldman's stock is under pressure, it's a great buying opportunity," said Larry Rosenthal, president of Financial Planning Services in Manassas, Virginia. "It's a good opportunity to buy on the dips ... As far as the banking sector goes, it's been oversold for some time."
Goldman shares fell 25.8 percent from $173.05 at the start of the year to their closing price of $128.49 on Tuesday, when they hit a year-to-date low after the earnings announcement. But they rose 2 percent on Thursday after Morgan Stanley's strong numbers.
"At the moment, Goldman is being inhibited by all of the government pressure on the company, which has been so extreme," said Richard Bove, a bank analyst with Rochdale Securities. "They've moved into a defensive stance and sort of lost their panache."
Bove's latest share price target for Goldman is $120.
BUY MORGAN STANLEY
Buying Goldman shares could also be a risky bet, some analysts say, and a better move would be to buy Morgan Stanley, which proved to have a strong quarter.
"At the moment since Goldman is selling at a small premium to book value and Morgan Stanley is selling at a significant discount to book value. Naturally, Morgan Stanley is a more attractive stock at the moment," Bove said. "Morgan Stanley might go up, while Goldman might go down."
Morgan Stanley shares jumped 10.7 percent on Thursday after the bank reported a strong increase in its second-quarter equity sales and trading revenue, up more than a third from the year-ago period, at $1.9 billion. Its investment banking business revenue rose 66 percent to $1.5 billion.
"There's an enormous amount of forward movement at Morgan Stanley, which does not exist at Goldman," Bove said.
Morgan Stanley shares, which peaked at $24.46 on Thursday, rose to their highest level in over a month.
SELL BANK STOCKS
Other investors see almost no upside in financial stocks in the near-term and recommend leaving big banks completely off the table. Concerns over U.S. economic growth have tightened the borrowing and lending environment, pressuring the sector as a whole.
"We felt pretty good about avoiding that group," said Tom McIntyre, chief portfolio manager at McIntyre, Freedman & Flynn, in Orleans, Massachusetts, who said he does not own any big bank stocks.
With strong earnings coming from other sectors, like information technology, McIntyre sees little need to dip into bank stocks.
"When the economy starts to grow -- and growth means borrowing -- through debt creation, the industry may turn around," he said.
"The economic uncertainty has put us in a position where none of these look attractive," said Jeffrey Sica, chief investment officer at SICA Wealth Management in Morristown, New Jersey. "I don't think they're oversold. I think they still have some potential downside."
(Reporting by Ashley Lau; Editing by Dan Grebler)
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