With the stock market engulfed in turmoil and increased volatility, investors may be on the lookout for stocks that can deliver big short-term gains. In that vein, Morgan Stanley has compiled a "conviction list" of stocks for which there is a high likelihood, in their analysts' opinions, that "one or more imminent events will drive the share price materially over the next 15-60 days." The report continues, "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."
Morgan Stanley names eight stocks for which they have high conviction about a positive near term view: Tesla Inc. (TSLA), Zendesk Inc. (ZEN), SBA Communications Corp. (SBAC), Molina Healthcare Inc. (MOH), FirstEnergy Corp. (FE), CyberArk Software Ltd. (CYBR), Bausch Health Companies Inc. (BHC) and Agilent Technologies Inc. (A). The key catalysts that Morgan Stanley sees for upside in these stocks are summarized in the table below.
8 Stocks That Can Outperform
|Agilent||Expect raised guidance on organic growth for 4Q 2018 & 2019|
|Bausch Health||Organic growth, key franchise momentum, EBITDA & EPS above consensus|
|CyberArk||Healthy demand, year-over-year (YOY) revenue growth about 17% for 2H 2018|
|FirstEnergy||Potential for significant additional cost cuts and resumption of dividend growth|
|Molina||Upside from expansion of Affordable Care Act (ACA) exchanges footprint in 2019-2020|
|SBA Communications||Broad-based demand, expected leasing uplift of about 50% from 1H to 2H 2018|
|Tesla||Expect strong 4Q guidance based on rising sales, improved working capital situation|
|Zendesk||Strong fundamentals, conservative estimates, reasonable valuation, good sales execution|
Source: Morgan Stanley
Significance For Investors
"Our strategists think that the market may take its cue from a few key themes," Morgan Stanley says in their report. These are profit margins, tariffs, and 4Q guidance. Their analysts will be paying close attention to management commentary on these themes during 3Q earnings calls. The report continues, "we think 3Q will be strong, but think the market will be more keenly focused on the forward outlook."
While profit margins are near historical highs, mentions of cost pressures are increasing in corporate commentary. The prospects for future margin growth will be a key concern for analysts. In particular, the report says, "to date, companies have given very little information on the potential impacts of tariffs to their bottom lines." On 4Q guidance, Morgan Stanley notes that 2018 has been a rare year in which earnings estimates have been rising throughout the year. With tailwinds diminishing and headwinds rising, the report warns that "the outlook for 4Q may be more challenging than the market appreciates."
"For each of these stocks, our analyst has a view that diverges from the Street's." — Morgan Stanley
Molina is a health insurer. The price target is $184, about 39% above the Oct. 24 open. The report anticipates that the forward P/E ratio will recover to its 3-year average of 23; based on that and a full-year 2020 EPS estimate of $7.97, that is how the price target is derived. Morgan Stanley expects that Molina will re-enter the health insurance exchanges in Wisconsin and Utah, giving a boost to earnings that they believe is not being anticipated in the consensus estimates. Also, the report notes that Molina's largest segment is Medicaid plans, which represent a high margin business, with potential for future cost savings.Agilent and Molina are representative cases among the stocks picked by Morgan Stanley in this report. Agilent provides instruments, software, services and products for laboratory use in both healthcare and industrial settings. Morgan Stanley's price target is $86, about 37% above the Oct. 24 open. This is based on organic growth of about 6% and the potential for profit margin expansion and free cash flow (FCF) growth.
These factors, plus a strong balance sheet, should support a greater valuation multiple. Agilent has strong sales in China, high leverage to cyclical upside in energy and chemical markets, and is well-positioned to increase market share in pharmaceutical and medical diagnostic markets.
It is possible, of course, that all these stocks on the conviction list can lose ground if Morgan Stanley's predictions prove to be wrong. Indeed, the report also includes stocks for which Morgan Stanley has a negative near term outlook, based on views from their analysts that are more pessimistic than the consensus. Whether Morgan Stanley or the consensus ends up being closer to reality for all these stocks, only time will tell.