8 Stocks to Outperform a 'Rolling Bear Market'

Morgan Stanley has released a massive study that identifies 30 stocks representing their "best long-term picks based on sustainability and quality of business model." They add, "Our Chief U.S. Equity Strategist, Michael Wilson, recently reiterated his view that we are likely to see a rolling bear market across individual stocks and sectors that results in a choppy, range-trading index for years—an environment in which stock-picking will clearly become more important." This is the first of two articles that Investopedia will devote to that study.

Among the 30 stocks recommended by Morgan Stanley are: Activision Blizzard Inc. (ATVI), Alphabet Inc. (GOOGL), Constellation Brands Inc. (STZ), BlackRock Inc. (BLK), The Bank of New York Mellon Corp. (BK), The Charles Schwab Corp. (SCHW), JPMorgan Chase & Co. (JPM), and Northrop Grumman Corp. (NOC). The Morgan Stanley report, "30 for 2021: Quality stocks for a 3-year holding period," was dated May 16.

Statistical Summary

For this first group of eight stocks, here are their one-year share price gains through the close on May 18, along with their forward P/E ratios based on estimated earnings for the next 12 months:

  1-Year Gain Forward P/E
Activision Blizzard 28.8% 26.8
Alphabet Inc. 12.1% 25.8
Constellation Brands 21.8% 23.0
BlackRock 38.6% 18.8
BNY Mellon 23.3% 13.4
Charles Schwab 54.3% 23.1
JPMorgan Chase 32.4% 12.3
Northrop Grumman 33.3% 20.5

Source: CNBC

Selection Method

"The main criterion is sustainability—of competitive advantage, business model, pricing power, cost efficiency and growth," the report says. Morgan Stanley paid particular attention to return on net operating assets (RNOA), capital structure, and "clarity and consistency of shareholder remuneration (dividends/buybacks)." Among qualitative factors, they also "incorporated key Environmental, Social, and Governance (ESG) principles, which can shed light on a company's approach to sustainable and responsible governance over the very long term."

As the report sums up their approach, "We have tried to identify the best franchises, not the most undervalued stocks." In conclusion, they write, "Our driving principle was to create a list of companies whose business models and market positions would be increasingly differentiated into 2021."

ATVI Chart

ATVI data by YCharts

Activision Blizzard

Morgan Stanley cites video game maker Activision Blizzard as "continuing to benefit from the industry's digital shift from 'units sold' to a model based on users, engagement and digital monetization." That is, profit growth should be spurred by the move from sales of physical game disks to downloads over the internet, which not only cuts costs, but also spurs subsequent follow-on sales of various enhancements. (For more, see also: Why Video Game Stocks' Hot Streak May Get Hotter.)

Excluding mobile users, Activision has about 90 million monthly users, with Morgan Stanley projecting 7% annualized growth over the next three years. Morgan Stanley applauds the company's investments in intellectual property (IP) and mobile gaming, which are expected to be major drivers of future growth. Also, they anticipate that the company is in a prime position to profit from the growth of eSports, and to exploit largely untapped opportunities to collect advertising revenues.

^SPX Chart

^SPX data by YCharts

Charles Schwab

The pioneering discount securities brokerage firm is a "secular winner from wealth management's digital revolution and regulatory evolution," per the report, based on the company's "brand power, broad product set and scale." Meanwhile, Schwab's "leadership position within the institutional channel should benefit from the secular tailwind toward independent advice, while its unique and broad-based retail offering continues to attract new clients and assets." (For more, see also: Charles Schwab the Walmart of Investing.)

The report hails a "diversified revenue stream" in which trading commissions represent only 10% of the total, with 40% coming from asset management and 50% from net interest income. It estimates that each 25 basis point increase in the Fed Funds Rate generates about $250 million in extra net interest income for Schwab. As a point of reference, the company's total revenues in the first quarter were $2.6 billion, per CNBC. Morgan Stanley indicates that Schwab grew revenues at an average annual rate of 12% during the past 5 years, and believes that this can continue.