Morgan Stanley’ best stocks
“We refresh our product, which aims to identify the most important themes across Europe that we believe investors cannot afford to overlook. We then use our analysts’ perspectives to highlight the best stocks to play each theme,” wrote the analysts led by Ross A. McDonald in a research note dated Sept. 27.
“We expect cyclicals to outperform given the prospect of rising bond yields and strong economic growth in 2022,” the analysts wrote, noting that cyclical stocks tend to fluctuate in tandem with overall economic performance.
Morgan Stanley chose building materials companies Holcim and HeidelbergCement for its “cyclical value” screen, saying both are likely to benefit from a “global resurgence” in construction. It assigned a 63 percent potential upside to Holcim’s base case price target and a 47 percent potential upside to HeidelbergCement.
Morgan Stanley’s base case price targets have a timeframe of 12 to 18 months.
Green color scheme
Morgan Stanley noted the European Commission’s focus on climate change, aiming for EU countries to be carbon neutral by 2050, when looking at companies poised to benefit from the “green recovery.” According to the analysts, government spending is likely to result in private companies investing in green initiatives as well. “As a result of this ‘green’ agenda,” they wrote, “investor focus on stocks exposed to related themes is likely to remain structurally high throughout this decade.”
According to Morgan Stanley, Alstom’s moves into green mobility provide it with potential revenue opportunities of around 25 billion euros ($29.2 billion). Siemens Energy, which Morgan Stanley likes for its knowledge and scale in hydrogen, is another of its favorite plays for the so-called energy transition.
Meanwhile, the bank emphasized steel supplier SSAB’s upcoming investments in climate change mitigation and stated that the company plans to return “significant” capital to shareholders.
Alstom has an 86 percent potential upside to the bank’s base case price target, SSAB has a 60 percent potential upside, and Siemens Energy has a 66 percent potential upside.
Morgan Stanley also has a “self-help” theme, which is based on companies that focus on cost-cutting or restructuring. With this in mind, the analysts chose steel company ArcelorMittal (with a potential upside of 48 percent), citing the sale of its U.S. assets for more than $1 billion. They also chose Engie, a utility company with a 46 percent potential upside to its base case. According to the analysts, “Engie is our preferred self-help/transformation story in Europe.”
Firms of medium size
Morgan Stanley chose pub chain Mitchells and Butlers in its search for mid-sized companies, giving it a 43 percent potential upside and calling the sector a “attractive reopening play.” It also likes TeamViewer because of its exposure to remote working and subscription services, and believes the stock represents “growth at a reasonable price,” with a 76 percent upside potential.
According to Morgan Stanley, Belgian mobile network Telenet Group Holding has a 43 percent potential upside due to its “healthy income,” “strong fundamentals,” and “attractive price.”
The resumption of business
As the reopening of Europe’s economies accelerates in the aftermath of the coronavirus pandemic, Morgan Stanley chose Associated British Foods, owner of fashion retailer Primark, saying it will benefit from “strong” demand as stores reopen. It also likes the company’s “very strong” balance sheet and believes the stock has a 54% upside potential.
“Investor interest in the ‘re-opening trade’ waned over the summer as a result of the renewed increase in [Covid-19] cases and, more broadly, delta variant concerns. However, we expect investor interest in this theme to rebound in the future,” the analysts said, adding that economically damaging lockdowns are less likely because many governments consider Covid-19 to be endemic.
Goldman bets on Japan stocks
Yoshihide Suga’s government had come under fire for how it handled the Covid-19 pandemic.
History suggests that Japanese equities will perform well both before and after the elections.
Investors bet on tech stocks
Technology stocks led a sharp sell-off on Monday, as rising inflation expectations pushed bond yields higher, prompting investors to dump high-value tech stocks across the board.
The Nasdaq Composite fell 2.1 percent, its sixth negative day in seven, as tech behemoths Apple, Alphabet, Amazon, and Microsoft all fell at least 2%.
Apple and Facebook shares fell 2.5 percent and nearly 5 percent, respectively, despite being higher in pre-market trading Tuesday. A Facebook whistleblower’s expose accusing the social media giant of prioritizing “profit over safety” for its users also contributed to the company’s share price decline.
Following Monday’s slump, Ives and his team claimed that Wall Street was underestimating the “tech growth story.”
“We continue to believe this pressure on the tech sector will be short-lived, with our belief that tech stocks will be up [more than] 10% by year-end,” the analysts wrote in an Oct. 4 note.
“We believe that, in light of the outsized growth prospects ahead, now is not the time to throw in the towel, but rather to double down on this opportunity.”
Picks for stocks
Ives and company named Apple as their top FAANG stock to buy; Microsoft, DocuSign, Matterport, and Pegasystems as cloud sector favorites; and Telos, Sailpoint, and Tenable as cyber security picks.
The analysts’ conviction stems from what they describe as a “multi-trillion” dollar digital transformation opportunity in the enterprise and consumer ecosystems that is still in its early stages.
“While valuations on tech names will fluctuate, and some WFH poster children, such as Zoom, are returning to more normalized levels of growth over time,” the note said. “Tech segments such as cloud, cyber security, and 5G are poised to see explosive growth rates over the coming year.”
Meanwhile, the uncertainty surrounding China’s increased regulatory scrutiny on capital markets and the recent crackdown on the country’s tech sector, which is still fresh in investors’ minds, will likely “drive more investment dollars into US tech stocks,” according to Ives.
Concerns about interest rates – and their impact on stock prices – are overstated, according to Michael Yoshikami, CEO and founder of Destination Wealth Management.
“I believe the sell-off is a bit overdone. “The ten-year Treasury [yield] is still in a pretty low range right now,” Yoshikami said on Monday’s “Squawk Box Europe.”
“The bigger news is what happened to Facebook, which centered on technology stocks ripe for a pullback after a pretty meteoric rise on the Nasdaq over the past year, as well as Facebook spreading itself around and infecting the tech sector and global market sentiment. This is a Facebook issue rather than an interest rate issue.”
Treasury yields were mixed Tuesday morning, but have recently risen. Last week, the 10-year Treasury yield surpassed 1.56 percent, its highest level since June.
Stocks that won volatility
The fourth quarter is often characterized by high levels of trading activity as investors close out their positions for the year and plan for the coming year. The market has been volatile at the end of the year in recent years.
From 2016 to 2020, six stocks made the cut, with an average fourth-quarter gain of 4.7 percent to 9.8 percent.
Take a look at these historically significant fourth-quarter winners.
Intercontinental Exchange, the parent company of the New York Stock Exchange, and Cboe Global Markets, which owns the Chicago Board Options Exchange, are two names on the list. During the previous five fourth quarters, the two stocks returned 4.7 percent and 8.4 percent, respectively.
Shares of exchanges tend to perform well during periods of volatility because these companies make money from transactions, so profits rise when trading volume increases.
Analysts are also bullish on Intercontinental Exchange, with a consensus price target that is roughly 20% higher than Monday’s closing price.
To be sure, past success does not guarantee future success, and five years is a statistically small sample size. Nonetheless, these stocks have been difficult to outperform in recent years.
NRG Energy has the highest average return on the list, with a 9.8 percent response rate in the fourth quarter over the last five years. Based on the consensus price target, the stock has a 15.4 percent implied upside.
On Analysts’s list of fourth-quarter winners, analysts believe healthcare company Hologic has the most room to grow. Hologic’s stock is expected to rise 21.4 percent over the next year.
Broadcom and AutoZone are two other companies that have a history of winning in the fourth quarter.