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Morgan Stanley Advises Traders on Top Stock Plays as Earnings Season Peaks
Investing in High-Quality Stocks
As corporate earnings season reaches its peak in the coming weeks, Morgan Stanley advises traders to look for certain stock plays. A third of the S&P 500 companies are set to announce earnings this week, as well as 40% of the Dow Jones Industrial Average. Investors will be keeping a close eye on mega-cap tech names Alphabet, Meta, and Microsoft, which have all seen shares surge amid the tech rally this year. Oil giants Chevron and ExxonMobil are also set to report their quarterly results, as well as major telecom companies and consumer names.
Morgan Stanley's Criteria for Stock Selection
Morgan Stanley Chief Equity Strategist Mike Wilson said in a Monday note that he expects "performance dispersion to rise" as more companies report their earnings. Wilson recommends investors choose stocks that exhibit high earnings quality, strong free cash flow generation, and improving earnings revision. The firm screened for stocks that fell under the following criteria:
- Top 1,000 U.S. stocks by market cap
- Top 2 quintiles of earnings stability
- Top 2 quintiles of earnings quality
- Overweight rating by the firm's research analysts
Health-care names UnitedHealth Group, Humana, and Elevance Health all appeared on Morgan Stanley's screen. UnitedHealth Group, the largest health-care company in the U.S., is also one of the names listed on the 30-stock Dow. The company's second-quarter results beat analysts' expectations on top- and bottom-lines. Investor sentiment was further boosted by the company raising the low-end of its full-year adjusted earnings outlook. T-Mobile, another one of Morgan Stanley's picks, will be releasing its quarterly results Thursday. Shares have only gained 1% in 2023, lagging behind the broad market index's 18.3% rise over the same period. Nonetheless, more than 90% of analysts covering the stock rate it a buy, according to Refinitiv. The consensus price target on shares implies nearly 26% upside from Friday's close.
Other Stock Picks
Automaker General Motors also made the list. The company is set to report earnings Tuesday before the bell. Wall Street will be looking to see if GM can continue its outperformance from the prior quarter, during which it posted an earnings beat and raised its 2023 guidance. Analysts polled by Refinitv estimate GM's earnings have jumped more than 60% in the second quarter. The stock has gained more than 16% this year. Household products manufacturer Colgate-Palmolive, another one of Morgan Stanley's picks, will announce earnings at the end of this week. Colgate-Palmolive has recouped some of its losses from the start of 2023 but is still trading down 2% year to date. Analyst Dara Mohsenian upgraded shares to overweight from equal weight in January and also named it his top pick in the household and personal care industry.
Conclusion: Implications for New Businesses
The advice provided by Morgan Stanley on top stock plays during the peak of earnings season can have significant implications for new businesses looking to navigate the stock market. As more companies report their earnings, there is expected to be increased performance dispersion. This means that the market will likely reward companies with strong financials and positive earnings revisions, while punishing those with lower quality earnings and instability.
For new businesses, this emphasizes the importance of focusing on high-quality stocks with strong earnings stability and cash flow generation. By prioritizing these criteria, investors can improve their chances of success in the market.
The stock recommendations from Morgan Stanley provide valuable insight on potential investment opportunities. Health-care companies such as UnitedHealth Group, Humana, and Elevance Health, as well as technology giants Alphabet, Meta, and Microsoft, are worth considering. Additionally, General Motors and Colgate-Palmolive are mentioned as potential investments.
For new businesses, analyzing these stock picks and understanding the reasons behind them can provide valuable insights into industries and companies that are performing well. This can help guide investment decisions and provide a benchmark for success.
Overall, the advice from Morgan Stanley highlights the importance of thorough research, careful analysis of financial metrics, and understanding market trends. By applying these principles, new businesses can navigate the stock market more effectively and increase their chances of success.
Article First Published at: https://www.cnbc.com/2023/07/24/morgan-stanley-says-stock-picking-will-matter-more-in-coming-weeks-so-buy-these-quality-stocks.html