As the reporting season for 2Q 2019 progresses, Morgan Stanley's analysts have identified 20 stocks for which they have "high conviction going into the earnings season...that one or more imminent events will drive the share price materially over the next 15-60 days," per their July 18 report, Conviction Into Earnings.
"For each of these stocks, our analyst has a view that diverges from the Street's, and expects a near-term event to drive the stock as the market's view moves closer to ours," the report adds. Stocks with high positive convictions from Morgan Stanley include these 10: American Express Co. (AXP), Chesapeake Energy Corp. (CHK), Domo Inc. (DOMO), Gilead Sciences Inc. (GILD), Invitation Homes Inc. (INVH), Nabors Industries Inc. (NBR), Neurocrine Biosciences Inc. (NBIX), Penn National Gaming Inc. (PENN), PG&E Corp. (PCG), and Uber Technologies Inc. (UBER).
Significance For Investors
The consensus earnings estimate for the S&P 500 in 2Q 2019 dropped by 6.5% since the beginning of the year, the report notes. Because "companies typically manage the Street well," they beat earnings estimates by about 5% on average. "However, we think the beat will be smaller this quarter."
Morgan Stanley observes that sales growth is projected to exceed earnings growth, but costs are rising more rapidly. "This profitability issue is being underestimated by others and could lead to further cost cutting action by corporations."
"The risk is now with the forward numbers" and "the focus now shifts to guidance for 2H19 and into 2020," per the report. "Estimates here still look materially too high to us, and we expect companies will begin to temper expectations for a second half recovery on this season's earnings calls."
Below are summaries of Morgan Stanley's views on the 10 stocks listed above.
American Express: 2Q revenue should accelerate based on fading strength of the U.S. dollar, brisk retail sales, and a wealth effect from rising investments that boosts cardmember spending; also, lower interest rates should reduce funding costs.
Chesapeake Energy: increased capital efficiency; 2Q 2019 capex may be 12% below consensus and production 1% above.
Domo: increased success by this cloud-based software vendor in making larger enterprise software deals with higher renewal rates.
Gilead Sciences: for 2Q 2019, expect a revenue beat driven by its HIV treatments, plus lower than anticipated expenses.
Invitation Homes: this home leasing company is expected to deliver "accelerating metrics" in the 2Q peak leasing season; "We see risks skewed to the upside."
Nabors Industries: "Sentiment is overly bearish" on this oil and gas drilling contractor; expect upsides from debt reduction.
Neurocrine Biosciences: sales of Ingrezza, a treatment for involuntary body movements associated with tardive dyskinesia, should exceed expectations.
Penn National Gaming: operator of Hollywood Casinos and racetracks; reported June weakness was in flood-impacted areas, but other properties appear to be outperforming.
PG&E: a bankruptcy judge is likely to rule on July 23-24 that PG&E will retain an exclusive right to offer a reorganization plan, "a positive outcome for investors that would remove an overhang on the stock."
Uber: investors appear to be unduly skeptical about Uber's ability to deliver durable growth and a clear path to profitability.
Of course, the upside catalysts that Morgan Stanley analysts expect for the stocks listed above might not materialize. Additionally, the report sees larger than anticipated near-term negatives building for several stocks, including rating agency Moody's Corp. (MCO), ON Semiconductor Corp. (ON), utility Southern Co. (SO), and industrial products distributor W.W. Grainger Inc. (GWW).