By Anne VanderMey
October 25, 2011

Shares have fallen 50% since February. Is this a buying opportunity, or do they have further to go? A bear and a bull face off.

The bull: David Hilder, Senior Analyst, Susquehanna Financial Group

Morgan Stanley (MS) has a great global investment-banking franchise and the largest retail brokerage force in the U.S. At some point, in a more robust economic environment, that franchise is going to generate a lot more profit. There are clearly uncertainties: what capital requirements are ultimately going to be or what type of proprietary trading will be allowed. But it’s rare that you can buy a great financial services franchise for 52% of the company’s estimate of its tangible value. Additionally, after the financial crisis, the company probably cut back too much on fixed-income trading, which it’s now rebuilding with good results. And the recent fears of European exposure are likely overblown. The stock is trading at $14; our 12-month target is $27.

The bear: Mike Mayo, Analyst, Credit Agricole Securities

Morgan Stanley has many irons in the fire. It’s restructuring sales and trading, wealth management is a work in progress, and the revamping of asset management is still to come. When you have that many irons in the fire, and many new executives, it’s easier to get burned. The company has a decade-long record of flip-flops, and at times they took too much risk when they should’ve taken less. I question their tangible book value number, given past risk-management mishaps that caused book value to get written down. The stock may look cheap, but in a worst-case scenario, in 2008, it traded as low as 25% of its claimed book value. This is a company that’s handled risk very poorly at a time when risk is close to an all-time high.

This article is from the November 7, 2011 issue of Fortune.


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