Morgan Stanley has identified 8 consumer stocks, representing the top picks of their analysts in the consumer staples and consumer discretionary market sectors, as consumer spending remains the largest and healthiest part of the U.S. economy. "Trade, the election, and a late cycle economy keep the market searching for new leadership amid high uncertainty. We expect disappointing EPS and are overweight defensive Staples," writes Morgan Stanley.

The 8 consumer stocks about which Morgan Stanley's analysts have "high conviction" are: Coca-Cola Co. (KO), Lowe's Companies Inc. (LOW), Procter & Gamble Co. (PG), McDonald's Corp. (MCD), Mondelez International Inc. (MDLZ), Nike Inc. (NKE), Penn National Gaming Inc. (PENN), and Philip Morris International Inc. (PM).

Key Takeaways

  • Morgan Stanley is overweight in defensive consumer staples stocks.
  • Several staples subgroups are among the most defensive.
  • A variety of consumer stocks have superior growth prospects.

Significance For Investors

Five of these stocks represent the top picks of Morgan Stanley's analysts in various categories of consumer spending. These are: Coca-Cola in U.S. beverages, Mondelez in U.S. food, Penn National in U.S. gaming, Philip Morris in tobacco, and Procter & Gamble in U.S. household products.

Out of 86 industries and sub-industries that Morgan Stanley ranked based on defensive metrics, the top 6 include 4 that are within the consumer staples sector. These are food products (1st), beverages (3rd), household products (5th), and food & staples retailing (6th).

Below are summaries of Morgan Stanley's views on 3 top picks that also are in the highly defensive industry groups listed above.

Coca-Cola is their top pick in U.S. beverages. Their price target of $60 implies a gain of 10.7% from the close on Dec. 5, based on "superior topline [revenue] growth vs. large cap CPG [consumer packaged goods] peers, driven by stronger pricing power, strategy changes, ramping innovation, and momentum in emerging markets, which we believe is not reflected in its current valuation." They add: "Catalysts include inflecting EPS growth in 2020 and improving FCF conversion."

Mondelez is their top pick in U.S. food. "We view MDLZ's recent topline acceleration as sustainable, aided by successful strategic changes implemented by management, increased reinvestment, as well as a favorable geographic/category footprint," the report says. Moreover, the valuation of Mondelez stock should be higher, in line with multinational consumer packaged goods (CPG) companies, rather than lower-growth U.S. food companies. Their price target of $60 would represent a gain of 11.5% from today.

Procter & Gamble is their top pick in U.S. household products. Positives are "recent high-quality topline acceleration, with strong breadth of improvement across the portfolio, and US share gains despite greater pricing than peers," as well as "inflecting gross margins, which we expect to be above consensus." As a result, P&G should post faster revenue and EPS growth than its peers, leading to a higher valuation multiple. Their price target is $134, or 7.5% above the current price.

Looking Ahead

While Morgan Stanley likes the defensive characteristics of consumer staples stocks amid a weak environment for corporate earnings, they note some risks . In general, they believe that price increases and profit margin expansion are likely to decelerate, given a decline in commodity prices. They also see stretched relative valuations in some subcategories, most notably household products and food & staples retailing.