Markets are down by a significant margin, and they could fall even further. In Morgan Stanley’s bear case scenario, the S&P 500 could fall another 10% from Wednesday’s close to 2,400 over the next 12 months. But despite having the most bearish S&P 500 forecast out of any firm on Wall Street as of early September, Morgan Stanley is still quite bullish on a number of large-cap stocks that it believes can outperform in the long term, according to its “Weekly Warm Up” bulletin from earlier this week.
Morgan Stanley is Bullish on these 6 Large Caps
|Walt Disney||$111.61||$135.00||+ 21%|
Source: Investopedia.com (Price), as of 4pm EST 10/24; Morgan Stanley (Price Target), as 10/22
What it Means
6 of those bullish picks include Walt Disney Company (DIS), E-Trade Financial Corp. (ETFC), Humana Inc. (HUM), Knight-Swift Transportation Holdings Inc. (KNX), Microsoft Corp. (MSFT), and Occidental Petroleum Corp. (OXY). Morgan Stanley has an “Overweight” rating on all 6 and price targets implying at least 21% upside and as high as 79%.
E-Trade’s Fast Growth. With a price target implying 48% upside, E-Trade has big expectations to fulfill, but not just Morgan Stanley’s. The company’s management set the bar high in its recent earnings call, announcing aims to expand its operating margin from the third quarter’s 47% to 50% by 2020 and mid-50% by 2023, as well as EPS growth in the mid-teens and an ROE nearing 3% above the 17% reported in the third quarter.
Occidental’s Rebound. In the face of a quick selloff resulting from Occidental’s announcement not to extend a production contract in Qatar, Morgan Stanley expects the stock to rebound significantly, with a 47% upside. The bank’s analysts believe the decision frees up capital to be channeled towards its high-return business in the Permian Basin.
Microsoft’s Promise. At a price target implying 27%, Morgan Stanley sees a number of promising factors driving Microsoft’s value. The bank’s analysts expect strong first-quarter earnings in 2019, investors to see the relative discount for EBIT growth, and other key secular drivers to improve, pushing the stock higher.
To be sure, these stocks will be operating in a tough environment, as even Morgan Stanley has warned that the stock-market selloff has only just begun. Factors raising concern include declining liquidity, the possibility that economic growth is starting to peak, and investors shifting into a more defensive mode. “We don’t think the correction is done yet,” the bank’s analysts stated, noting further that, “we think attempts to rebound were more short lived than sustainable.”