Morgan Stanley “cheap” picks
“Stocks positively correlated with the oil price have pulled back in recent months and look extremely cheap,” Morgan Stanley said in a research note published Sept. 17, naming a slew of stocks poised to benefit as oil prices rise.
Their selections may appeal to investors interested in ESG — stocks that consider environmental, social, and governance factors — who avoid petrochemical companies due to their high carbon emissions.
Oil demand plummeted along with stock prices at the start of the pandemic in March 2020, but has since recovered, topping $70 per barrel.
The materials, capital goods, and technology sectors are among the stocks on the bank’s list of “European Cyclical stocks most positively correlated to changes in the oil price.” Cyclical stocks tend to fluctuate with the broader economy, and the bank studied the correlation between stocks and the oil price over the last five years.
Steel company ArcelorMittal and mining company Glencore are among the bank’s material picks. It has an overweight rating on both stocks, which is its most positive stock rating.
In the transportation sector, its overweight picks include Daimler and Airbus, as well as Stellantis and French auto suppliers Valeo and Faurecia.
The bank is also bullish on several technology stocks, including semiconductor companies Infineon and STMicroelectronics, as well as travel technology company Amadeus, consulting firm Aveva, and employee benefits company Edenred.
Building materials firm Holcim, as well as construction firms Vinci and Eiffage, were among its capital goods picks.
“These screens can be useful for investors who want to express a directional view on the oil price or hedge the risk of a further large move in the commodity without necessarily buying or selling Energy stocks directly,” the analysts wrote.
High expectations for Tesla’s third quarter
“We believe Q3 will be TSLA’s strongest quarter ever, and we are raising our 2021 estimates accordingly,” said Alexander Potter of Piper Sandler in a note Tuesday.
Piper Sandler raised its 2021 forecast and maintained its overweight rating on Tesla. Analysts also maintained a $1,200 price target on the stock, implying a 51.6 percent increase from Monday’s closing price.
Tesla now expects to deliver 894,000 vehicles in 2021, up from its previous estimate of 846,000. According to FactSet, the consensus on Wall Street is 800,000 people.
Piper Sandler’s bullish outlook includes more than just production.
“People frequently focus on deliveries, but this metric probably gets too much attention,” Potter said. “We are more concerned with margins, which we believe will be particularly strong in Q3.”
Tesla is expected to earn $1.67 per share in the third quarter, exceeding the Wall Street consensus of $1.39.
Piper Sandler anticipates that Tesla’s market leadership will expand.
“Tesla’s market share has also continued to rise (look for China’s market share to inflect higher in September due to a focus on domestic deliveries over exports),” Potter said.
Tesla’s stock is up 12.1% in 2021, trailing the S&P500’s 18.3% gain this year.
Wall Street loves energy stocks
West Texas Intermediate crude futures, the U.S. oil benchmark, reached their highest level in more than two months on Monday, while Brent crude, the international benchmark, reached levels last seen in October 2018. Oil prices are rising as demand recovers, but supply remains constrained, thanks in part to Hurricane Ida, which shut down production in the Gulf of Mexico.
Meanwhile, natural gas futures jumped more than 8% at one point Monday, putting the contract on track for its best quarter since 2005.
Part of Wall Street’s bullish case for energy stocks is based on the expectation that oil will continue to rise. Goldman Sachs raised its year-end Brent forecast to $90 per barrel on Sunday, up from a previous target of $80.
“While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with global demand recovering faster than our above consensus forecast and global supply remaining short of our below consensus forecasts,” analysts led by Damien Courvalin wrote in a client note.
On Monday, Brent was trading around $79.50 per barrel, while WTI was trading around $75.40 per barrel. For 2021, both benchmarks are up more than 50%.
Energy has reclaimed the top spot in the S&P500 after briefly losing it over the summer, rallying more than 40% year to date. However, the group’s performance has lagged behind that of the commodity.
“The disparity in performance between the price of oil and the sector, in our opinion, suggests that oil stocks may have further upside in the near term,” wrote Oppenheimer Asset Management chief investment strategist John Stoltzfus in a client note.
Meanwhile, BMO analysts believe the oil market is in the “early stages of a multi-year upcycle,” citing parallels between the current market and oil activity between 2002 and 2014.
According to BMO, the energy sector has the best financial outlook in more than 15 years, despite rising demand and limited supply.
“We see compelling value in the North American oil and gas group as the sector’s return on capital employed balloons to near all-time highs on the back of rising commodity prices, improved cost discipline, and management teams’ increased focus on generating returns,”
Conoco, Devon, Pioneer, and ARC Resources are among the firm’s top picks.
According to Bank of America, US oil companies are in the “early stages of an extended cyclical recovery.” While many U.S. exploration and production companies have recovered from the lows of 2020, the majority are still below pre-Covid levels, according to the firm.
In the future, the firm prefers Exxon, Occidental, APA, and Diamondback Energy.
Exxon is also on Goldman’s buy list as oil prices rise, and the firm is also bullish on ConocoPhillips.
“We contend that a premium valuation is justified by a solid asset base and historical trading patterns. Exxon’s earnings beats are also expected to continue in the future, according to the firm. Goldman has set a 12-month price target of $68 on the stock, which is 18% higher than where it closed on Friday.
“We are selectively increasing what was previously very low exposure to China to some of what I call high quality names,” said Herro, Oakmark International Fund portfolio manager and Harris Associates’ chief investment officer of international equities.
Herro singled out e-commerce giant Alibaba, technology company Tencent, and online retailer Vipshop as examples of Chinese companies.
The money manager stated that he is “pleased” with Chinese names accounting for between 5% and 8% of his portfolio.
“We’re not getting super aggressive,” Herro explained, “but at these prices, there’s so much risk already incorporated into the share prices that we think it makes sense on a risk-return basis.”
Beijing regulators’ crackdowns this year on companies such as ride-hailing app Didi, as well as sectors such as education and gaming, have put pressure on Chinese stocks.
Herro stated that he was “significantly underweight” on Chinese stocks prior to the recent regulatory developments that have caused those stocks to fall.
“We kept a close eye on the situation,” he said.
The value investor was also optimistic about European financial stocks, which are expected to benefit from rising interest rates and economic growth but trade at a discount to their American counterparts.
“We see this as one of our strongest areas of strength going into global financial markets in the medium term,” Herro said.
Barclays’ best buy-the-dip
Concerns about the Covid-19 delta variant, the Federal Reserve’s tapering plan, China, and other factors shook markets this month. After wild swings in the markets, the three major averages are all down more than 1% in September.
The Wall Street firm looked for buy-rated stocks with prices lower than their 50-day moving averages but more than 10% upside to their price targets. In addition, the group has outperformed the S&P500 over the last six months.
Nike, the world’s largest shoe company, is down nearly 10% this month. On Friday, the apparel stock fell more than 6% after the company reduced its full-year sales growth guidance. According to the company, supply chain issues in Vietnam are slowing sales. Nike now expects revenue growth in the mid-single digits for its fiscal year 2022, down from previous guidance of low double-digit growth.
Barclays sees the athletic retailer’s weakness as a buying opportunity. Nike’s stock is expected to rise 16 percent over the next year, according to the firm.
RH, Target, and Estee Lauder all made the list compiled by Barclays. According to the firm, RH will increase by 31% and Target will increase by 15% over the next year.
Following a drop of more than 6% this month, Barclays’ price target for Estee Lauder implies a 10% increase.
A few real estate stocks were also included on Barclays’ list. Rental real estate investment trust for single-family homes Industrial and American Homes 4 Rent REIT Duke Realty and Prologis are both down more than 7% for the month, while Duke Realty is down more than 5%.
According to Barclays, American Homes 4 Rent will increase by 23 percent over the next year. Duke Realty and Prologis are expected to rise 16 percent and 23 percent, respectively, over the next year, according to the firm.
According to Barclays, technology companies PayPal and Adobe are also good buy-the-dip candidates.
PayPal surged at the end of August after analysts reported that the payments company was looking into launching a stock-trading platform for US customers.
PayPal is expected to increase by 25% and Adobe by 17% over the next year, according to Barclays.
Morgan Stanley recommends crypto bank stocks
Silvergate Capital is Silvergate Bank’s parent company.
“Silvergate is one of the most distinctive banks we cover,” said analyst Ken Zerbe in a Monday investor note. “We see a 3:1 bull:bear skew, but recognize that Silvergate has the most diverse risk-reward profile of any bank we cover, as its growth is directly linked to the health and growth of the cryptocurrency industry.”
Based in San Diego Silvergate is Morgan Stanley’s fastest-growing bank, according to Zerbe, and it would be “inappropriate” to value Silvergate as a traditional bank. Instead, he contrasts it with other fast-growing financial companies such as Visa, Mastercard, and PayPal.
Silvergate’s stock had risen roughly 680 percent in the previous year, owing to the bitcoin bull run and a surge in institutional interest in crypto and other digital assets such as NFTs and stablecoins.
Growth in core deposits to the Silvergate Exchange Network, or SEN, is a critical component of Morgan Stanley’s investment thesis, according to Zerbe. Customers who deposit dollars into Silvergate can use the SEN to transfer money around the crypto ecosystem. Year on year, core deposits increased by 581 percent to $11.4 billion.
Morgan Stanley anticipates 37 percent annual earnings-per-share growth through 2025, with additional earnings potential from lending or fee-based products that have yet to be introduced. Silvergate currently offers bitcoin-backed dollar loans, which Morgan Stanley expects to be the primary driver of loan growth, according to Zerbe.
When compared to traditional banking, the cryptocurrency industry has been innovating at breakneck speed, and while traditional banks have made strides toward becoming more digital, “the core products and service model of the more traditional banks feels largely unchanged from five or ten years ago,” Zerbe said.
“The only place we feel we have seen any signs of more significant shifts in business models has been from banks pivoting their business models toward either cryptocurrency or blockchain,” he added, citing New York-based Signature Bank and New York Community Bank as examples.
Piper Sandler likes Best
Piper Sandler raised its price target to $150 per share from $146. The new forecast implies a 43.2 percent increase from Best Buy’s Friday closing price. The company maintained its overweight rating on the stock.
“BBY is quickly becoming one of our top ideas under coverage,” said Peter Keith and Robert Friedner of Piper Sandler.
Furthermore, Best Buy shares are trading at a significant discount to its peers, making the stock relatively cheap, according to the analysts.
Best Buy shares have underperformed the market this year, rising about 5% in 2021 versus the S&P500′s 18.6 percent gain.