The stock market's sharp downdraft and rising volatility are prompting many investors to look for stocks that are most likely to buck the tide in the short term. They might consider the most recent "conviction" list from Morgan Stanley. "Our analysts believe that one or more imminent events will drive the share price materially over the next 15-60 days" for the stocks on this list, the firm writes in a report.
With the third quarter earnings season now at hand, Morgan Stanley analysts have the highest "conviction" for possible short term gains regarding these 10 stocks: Anthem Inc. (ANTM), AT&T Inc. (T), Diamondback Energy Inc. (FANG), DXC Technology Co. (DXC), Eaton Corp. PLC (ETN), Garmin Ltd. (GRMN), Liberty Formula One (FWONK), Occidental Petroleum Corp. (OXY), PG&E Corp. (PCG) and SVB Financial Group (SIVB).
10 Short-Term Winners
|Anthem||Accelerating revenue growth|
|AT&T||Cost synergies with Time Warner, wireless growth and industry consolidation|
|Diamondback||Monetizing assets through spinoffs into LPs|
|DXC||Improving margins, increased dividends and buybacks|
|Eaton||Accelerating electrical equipment sales, margin expansion|
|Garmin||Market share gains in aviation beating consensus estimates|
|Liberty Formula One||More races, new advertising and sponsorship deals|
|Occidental||Big stock buybacks|
|PG&E||Liability for 2017 Tubbs Fire likely to be much less than anticipated|
|SVB Financial||Stronger loan growth and net interest margin expansion than peers|
Source: Morgan Stanley
Significance For Investors
The U.S. Equity Strategy team at Morgan Stanley expects third quarter corporate earnings and revenue results to be strong, in line with the consensus forecasts of year-over-year (YOY) growth rates that equal 19% and 7.2%, respectively, for the S&P 500 Index (SPX). Nonetheless, they expect that the market will be "more keenly focused" on whatever forward guidance from management comes out of earnings calls. In particular, they expect that the areas drawing the most interest will be: cost pressures and the direction of profit margins; the impact of tariffs on profits; and guidance on the 4Q outlook.
As reflected in the table above, Morgan Stanley sees several catalysts for its 10 "conviction" stocks, including better than anticipated sales growth; increasing profit margins; bigger returns of capital to shareholders through dividends and share repurchases; and improved competitive position.
Three stocks illustrate this in more detail.
Tailwinds for Anthem. Enrollments and margins are up in several key business segments for the health insurer. Moving its pharmacy benefit management (PBM) in-house from Express Scripts creates a "significant profit opportunity," partly through integration with existing plans.
Clarity on the 'New AT&T.' The first full quarter that includes the contribution of Time Warner will be the third quarter. A big date coming up is Nov. 29, when AT&T will present its multi-year financial outlook. While wireless price wars continue, "competition has rationalized" and service revenue is growing again for the industry. Potential consolidation from 4 to 3 major wireless players is expected to provide "upside opportunities," assuming the proposed merger between T-Mobile and Sprint is approved, leaving AT&T and Verizon as the others. Dividend payouts seem sustainable.
SVB Financial. "One of the few banks that we think could beat expectations," Morgan Stanley says. SVB has beaten loan growth expectations for several years, and current guidance may be too conservative, calling for 3.4% loan growth in the third quarter from the previous period, whereas quarter-to-quarter growth averaged 5.2% in the first half of 2018. The prospect for net interest margin (NIM) expansion is well above that for its peers, since "SIVB is the most asset sensitive bank that we cover, given roughly 90% of its loans are variable rate (with most tied to Prime)."
Investors need to be alert and nimble in choosing these stocks in anticipation of short term gains, given that the various positive catalysts outlined by Morgan Stanley may or may not emerge. Alternatively, several of them actually may be better suited for long term investors, based on lengthy positive trends that Morgan Stanley expects to continue, as with Anthem and SVB Financial, or potentially AT&T.