Morgan Stanley’s Trigger PLUS linked to S&P 500 Value ETF bet on a shift to value

By Emma Trincal

New York, May 27 – Morgan Stanley Finance LLC’s 0% Trigger PLUS due May 29, 2026 linked to the iShares S&P 500 Value ETF provide exposure to value stocks that are holding up in the current pullback and may provide higher returns than currently beaten-up growth stocks, a financial adviser said.

If the ETF return is positive, the payout at maturity will be par plus 140% of the ETF return, capped at par plus 48%, according to an FWP filing with the Securities and Exchange Commission.

Investors will receive par if the ETF return is negative but ends at or above the 80% trigger and will lose 1% for every 1% decline if it ends below the trigger level.

Outperformer

“I kind of like this deal,” said Scott Cramer, president of Cramer & Rauchegger, Inc.

“Value is going to do well. If I had to pick value versus growth over the next four years, I would pick value.

“It’s less volatile.”

The iShares S&P 500 Value ETF offer exposure to large U.S. companies that are potentially undervalued relative to comparable companies, according to the iShares website.

Cramer pointed to the outperformance of the underlying versus the iShares S&P 500 Growth ETF. The decline of the former for the year to date is 6% versus 22.3% for the latter.

“Cash-flow is mattering. Value will outperform growth in the short term. I don’t think the Fed is going as accommodative in the next four years as it has been in the past 10 years,” he said.

Terms

Cramer liked the structure as well.

“The 80% barrier is reasonable. I’d rather have a buffer, but they didn’t ask me,” he said.

“The leverage gives you sufficient upside.

“You get a 48% cap. It is what it is. It’s not unreasonable.”

The 48% cap over four years with a 1.4x leverage factor provides 10.3% per annum on a compounded basis.

“The bet is you’re not getting more than 48% in four years. If you’re wrong, you’re still getting a good return.”

Downturn opportunities

Many believe that growth and technology stocks are oversold, which brings new buying opportunities as illustrated by last week’s rally.

Meta Platforms Inc. for instance is down more than 42% for the year while Netflix Inc. has plummeted 68%.

While some analysts believe the market is set for a rebound, others pointed to the risk of bear rallies, which can be strong but short-lived and deceptive.

Dangerous dips

Cramer said he wants to stick to value stocks at this time. He expressed skepticism about the buy-the-dip strategy applied to growth stocks.

“Some people want to buy anything that has dropped the most. It’s the buy-the-dip mantra and it’s ridiculous,” he said.

“There’s a reason why a lot of those growth stocks have dropped 30%, 50%, 60%. The companies were not making money. It was just based on profits expectations in the future. Higher rates put an end to that.

“When people say: buy the dips, they are not looking at the profitability of a business. They’re just gambling.

“But we’re facing headwinds. The economy may not be as robust. We’re at a point where a solid balance, profitability and cash-flows matter.”

Limited returns

Jeff Pietsch, founder of Capital Advisors 360, would not consider the notes.

“For a retail or high-net worth client, I’m not really excited by this product,” he said.

“Coming out of a bear market and with four years ahead of us, we should have a significant upside, something greater than 48%. I have a problem with the cap.

“A lot of the damage in the stock market has already been done.”

But for an institution, the same reasoning may not necessarily apply, he added.

Mandate for value

“If an institution has a mandate to be diversified in equities and if they hold value stocks in their portfolio, it starts to be more attractive,” he said.

“The 20% downside protection and the asymmetry with the levered upside would make the notes attractive for this type of client especially one betting on a protracted sideways market due to inflation. Only in that case the tradeoff cap for leverage would make sense.

“In other words, this note would be a good fit for an institutional investor with a mandate for value and a very modest forward-looking view.”

Growth

For more aggressive investors on the retail side, buying depressed stocks may be a better strategy.

“For retail investors, I’d rather take that bet on the growth side of the S&P rather than the value side. Growth stocks have dropped much more. You get a better entry point,” he said.

Capping the upside ahead of a market rebound was not a sound approach, he noted.

“Coming out of a bear market, returns can be quite high,” he said.

“So, the cap here is the deal-breaker.

Another problem was the exposure to one strategy only.

“I’d rather have the flexibility to choose the sectors that I want rather than being confined to an investment style like value especially for the next four years,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes were expected to price on May 26 and to settle on June 1.

The Cusip number is 61774DBG1.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.