Big banks stand to benefit from the crisis in regionals. So we’re adding to one on this week’s drop

With Morgan Stanley shares coming under pressure this week as a result of the ongoing crisis of confidence in regional banks, we’re stepping in to take advantage as the stock finds support below our overall cost basis. Morgan Stanley has dropped 6% since its April 28, even with Friday’s roughly 2% advance in the broader stock market rally.

While the issues at regional banks are lurking as a headwind for the market and will likely keep upside in the financials sector limited in the near term, we think that Morgan Stanley comes through this period of uncertainty as an even stronger bank than it was previously.

Less than two weeks ago, Morgan Stanley reported a very strong first quarter with management calling out about $110 billion in net new assets for the quarter, about $20 billion of which the team believes resulted from regional bank outflows following the collapse of Silicon Valley Bank in March.

With the regionals coming under additional pressure following the news that PacWest Bancorp (PACW) was exploring strategic options, including the possibility of a sale, we wouldn’t be surprised if the bank was seeing additional money coming in now. PacWest has been all over the map this week — down some 70% from the April 28 close to Thursday’s close of $3.17, and then up some 85% on Friday.

In addition to the very real likelihood that Morgan Stanley is continuing to benefit from the decline in confidence at regional banks, we know that management is working diligently to ensure they protect the bottom line, including an announcement this week that the team is looking to eliminate about 3,000 jobs by the end of June.

While we wait for the pressure in financials to abate and for investors to start differentiating the banks that are actually in trouble from those that are benefiting fundamentally but suffering as collateral damage, we are happy to stay patient and collect Morgan Stanley’s nearly 4% annual dividend while management also takes advantage of the stock decline to repurchase shares. With this trade, we are upgrading shares to a 1-rating, in line with Friday’s buy.

(Jim Cramer’s Charitable Trust is long MS. See here for a full list of the stocks.)

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