Are shares in IOOF Holdings Limited (ASX:IFL) and AMP Limited (ASX:AMP) about to rally?

Every dog is entitled to have its day and Morgan Stanley thinks two blue-chip dogs will outperform over the next month.

The two stocks are embattled wealth managers IOOF Holdings Limited (ASX: IFL) and AMP Limited (ASX: AMP) as the Banking Royal Commission sparked a wave of panic selling in the sector.

The Royal Commission is expected to hand in its interim report at the end of this month and investors are nervous about what Commissioner Kenneth Hayne will recommend to the government in the way of new regulations and even the potential breakup of large financial organisations.

The uncertainty has caused the share price of AMP to crash 38% since the start of the year while IOOF (IFL) has taken a 25% hit.

Interestingly, not even the big banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) have fallen as hard even though they are swept up in the Royal Commission, which is recommending criminal charges be brought against Commbank and National Australia Bank Ltd. (ASX: NAB).

The silver lining is that the brutal selldown in IOOF and AMP may be setting the companies up for a big rebound with Morgan Stanley predicting that there is a 70% to 80% chance that their shares will outperform the sector over the next 30 days.

The broker notes that AMP is trading near its “bear case” valuation and that makes its short-term valuation very compelling.

“Our bear case assumes a 30% Wealth fee squeeze, A$15bn outflows over the next three years, 20% of advisers triggering BoLR [Buyer of Last Resort], negative market returns until 2020, Bank at 20% discount vs base case and value assets (Life, Mature, NZ) at 0.5x P/EV [price to enterprise value],” said Morgan Stanley.

“The Royal Commission is unlikely to recommend a break-up of the vertically integrated model, in our view.”

The BoLR requires AMP to buy its advisors out at a valuation that is above market value. AMP doesn’t have the financial resources to buy all its advisors out.

If the vertically integrated business model can stay intact, that will also be great news for IOOF, which is trading under the broker’s bear case valuation.

Morgan Stanley also believes that market concern that IOOF’s acquisition of Australia and New Zealand Banking Group‘s (ASX: ANZ) wealth business will fall through is overdone.

The broker has an “overweight” recommendation on both stocks and a price target of $4.25 on AMP and $12.00 on IOOF.

Buying either stock (or even the banks for that matter) is a gutsy move and probably isn’t for the fainthearted.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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