In the wake of the steep October sell-off, Morgan Stanley is seeing a dramatic shift in the broader market from growth to value stocks. In this new world, stocks will be buffeted more than ever by low liquidity, rising volatility, slashed earnings forecasts for 2019, and the fading impact of tax cuts. With that in mind, Morgan Stanley has compiled a list of stocks that it argues will thrive in this tough environment and which can rise sharply and dramatically outperform the market. Investopedia discussed 7 of these stocks on Wednesday in the first of two stories. Today, in the second installment, we go into detail on 7 more.
They are: BeiGene Ltd. (BGNE), SVB Financial Group (SIVB), Athene Holding Ltd. (ATH), Apollo Global Management LLC (APO), United Rentals Inc. (URI), Ameriprise Financial Inc. (AMP), and Southwest Airlines Co. (LUV).
7 Value Stocks with Big Upside
|Apollo Global||Capital Markets||42%|
|United Rentals||Trading Companies & Distributors||40%|
|Ameriprise Financial||Capital Markets||40%|
Source: Morgan Stanley, as of 11/05
What it Means
In its latest Weekly Warm Up report, Morgan Stanley says that it screens for stocks that underperformed since the market’s peak in the latter half of September and also those on which the bank’s analysts are still bullish.
“We screen for stocks that have materially underperformed the market since the recent peak and where our analysts maintain a positive view on risk-reward”— Morgan Stanley
More specifically, the stocks that pass the screen are those that are down twice as much as the market between 20 September and 2 November, have an overweight rating from Morgan Stanley, have a greater than 20% upside, have a market capitalization greater than $5 billion, and have net debt less than three times EBITDA over the last twelve months (LTM), among others. Notably, the stocks that pass the screen hail from a broad range of more than ten different industries, from insurance to biotechnology and from capital markets to airlines.
Southwest Airlines, for example, while down about 17% from its recent peak in September, has a market cap of $29.7 billion and upside to Morgan Stanley’s price target of 31% going forward. With comparatively low airfares, commuter benefits, efficient operations, and the second largest market share in the industry at 18%, Southwest has a business model that makes it one of the best airline companies in the entire industry. In a recent note to clients, JPMorgan remarked on the airline industry noting, the “case for industry margin expansion remains the best we’ve seen in four years,” although they also downgraded Southwest from neutral to underweight.
That another bank has a less optimistic opinion about a particular stock is just a reminder that the outlook going forward is murky, with different analysts having very different opinions. Yet, while the current market, if it falls, could bring all stocks down with it, the picks by Morgan Stanley may still be able to outperform, simply by declining less than all the rest.