Morgan Stanley is becoming one of the most cautious major U.S. investment banks, warning that the “easy” market environment that has persisted for years is drawing to a close, and calculating that potential returns for the U.S. stock market are at their lowest level since before the financial crisis.
The firm’s view, that it “expects a choppy, rangebound equity market at the index level,” suggests that investors are in “an environment in which stock picking becomes key,” it wrote to clients.
With that backdrop, the investment bank named what it called its “30 for 2021,” a group of stocks that it recommended holding for three years. They are “our best long-term picks based on sustainability and quality of business model,” analysts wrote.
The main criterion for the group, the analysts said in a Wednesday note, is “sustainability of competitive advantage, business model, pricing power, cost efficiency, and growth.” Rather than going for the most undervalued names on the market, the analysts said they “selected the companies that scored exceptionally well on these criteria, paying special attention to [return on net operating assets], management’s attitude toward capital structure, and clarity and consistency of shareholder remuneration.” So-called ESG factors — which refers to environment, social, and corporate governance — were also taken into account.
The group of 30 includes a number of names that should be extremely familiar to investors, including: Amazon.com Inc. AMZN, +0.71% Google-parent Alphabet Inc. GOOGL, -0.07% JPMorgan Chase & Co. JPM, +0.27% Visa Inc. V, -0.16% and Walt Disney Co. DIS, +2.06%
Amazon stands to benefit from a number of “emerging high-market revenue streams,” the firm wrote, citing its advertising, subscription, and web services (cloud computing) divisions. These should “give Amazon a growing ‘pool’ of gross profit dollars to invest more aggressively than ever and still deliver better-than-expected profitability.” It added that the e-commerce giant was “unique among large-cap tech and retail due to strong brand recognition, customer loyalty (aided by growing Prime memberships), growing recurring revenue base, and wide moat.”
Dow component JPMorgan stands as Morgan Stanley’s “top pick” among U.S. money-center banks. The company’s “push into new markets, opportunity to gain share, efficiency improvements, and benefit from deregulation drive our positive long-term view,” it wrote.
Credit-card giant Visa has “one of the best business models we’ve seen,” the investment bank argued, calling it “a prime beneficiary of consumer spending trends and ongoing secular shifts from cash/check to electronic forms of payment.”
All four of those companies have outperformed the broader market thus far this year. Amazon is up more than 30%, while Visa has gained about 15%. JPMorgan shares have risen 6% in 2018 while Alphabet’s 3.3% rise is above the 1.8% gain of the S&P 500 SPX, +0.41%
Bucking that trend is Disney, where shares have dropped 2.4% despite the massive success of its Star Wars and Marvel franchises.
“We believe Disney’s unique brands and scale, potentially augmented further by Fox’s assets, help position it to emerge as a winner in the next phase of TV consumption over the internet,” Morgan Stanley wrote.
The full list of 30 stocks is below.
