With major U.S. stock indexes within striking distance of record levels, are there any stocks that have further room to grow?
There are still some values to be had, according to Morgan Stanley, which unveiled a new version of its “Fresh Money Buy List,” a collection of the firm’s ultimate picks for equities. The list, “10 of the firm’s best stock recommendations,” are all companies that are expected to outperform based on “specific catalysts such as a change in industry fundamentals, a positive [earnings] surprise, or new product introduction.”
The picks aren’t designed to be long-term holdings, necessarily. Morgan Stanley sees them as good buys over the near term, which it defined as a three- to six-month period. Because of that, it expects its Buy List to exhibit heavy—if not total—turnover with each new iteration.
In a report announcing the list, Michael Wilson, the investment bank’s chief U.S. equity strategist, said the team wouldn’t “force names onto the list to fit our sector views or other macro constraints,” and that it wouldn’t necessarily behave like a diversified portfolio. However, this version does include picks from across the economy; of the 11 primary S&P 500 sectors, nine are represented on the list, and only one sector—technology—has two components.
One of those tech picks was Microsoft Corp. MSFT, +0.35% which Morgan Stanley sees as having upside potential beyond the six-month time frame indicated by the list. “Accelerating revenue growth, improving margins, and capital return drives a high-teens total return profile for Microsoft over the next three years,” the note read.
The other technology component was another Dow component: Cisco Systems Inc. CSCO, +0.11% which Morgan Stanley wrote was the “best positioned” stock to lower costs associated with companies that suffer security breaches.
A third Dow component also made the list, the consumer-discretionary giant Walt Disney Co. DIS, -0.64% Wilson’s team said the company, which owns Pixar and the highly successful Marvel and Star Wars franchises, stood to benefit from the trend to over-the-top video consumption, or a content creator directly distributing its titles to consumers by a streaming app, for example, as opposed to going through a network. It can also see “further growth from affiliate revenue, parks, and film,” Morgan Stanley wrote, adding that it trades at a discount to the market.
So far this year, Microsoft is up 9.7%, while Cisco has gained 18.2% and Disney has dropped 3.4%. The S&P 500 is up 2.8% while the Dow is up 0.2% and the Nasdaq Composite Index has climbed 8.6%.
Morgan Stanley’s other picks include T-Mobile US Inc. TMUS, -0.11% due to its improving free cash flow and capital return to shareholders; the utility NextEra Energy Inc. NEE, +0.08% as its “premier” renewable unit are expected to offer both heavy earnings and dividend growth through 2020; and E*TRADE Financial Corp. ETFC, -0.73% because its earnings should rise alongside improving net interest margins.
T-Mobile is up 2% in 2018, while NextEra has risen 1.2%. E*TRADE has rallied 15.3%.
The other picks are: transportation company Knight-Swift Transportation Holdings Inc. KNX, +0.94% Iqvia Holdings Inc. IQV, +0.48% materials company LyondellBasell Industries N.V. LYB, -1.18% and the energy firm Continental Resources Inc. CLR, -0.68%
While Knight and Iqvia have both outperformed the S&P 500 thus far this year—rising 11.9% and 7.1%, respectively—the other two are in negative territory. LyondellBasell has dropped 1.4% and Continental is down 0.5%.
