MORGAN STANLEY: Buy these 21 stocks set to soar at least 50% as their earnings rebound from a COVID-induced rout

  • Mike Wilson, Morgan Stanley's chief investment officer, compiled a list of 21 stocks that could appreciate more than 50% as their earnings recover.
  • Wilson screened for stocks with "material upside with higher 2022 earnings on a normalized multiple."
  • In September, Wilson utilized a similar strategy with eye-popping results.
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With vaccine announcements from both Pfizer and Moderna, it feels safe to say that investors are looking forward to a post-COVID market environment. After all, in just a few months time, they've had to endure the fastest ever bear market, double-digit unemployment, and a steep plunge in GDP.

Now, with the prospect of another COVID-induced stock rout growing more faint by the day, Mike Wilson, Morgan Stanley's chief investment officer, thinks it's time to get back to basics.  

"Our micro view matches our macro view in that we want to invest with the upward trajectory of earnings while avoiding paying too much for growth," he penned in a recent client note. "This means that any screens should assume earnings are the key upside driver and assume lower multiples due to rates rising and the falling counter-cyclical multiples."

In the past, that strategy of finding companies with improving earnings prospects proved fruitful. In September, Wilson was on the lookout "for upside in stocks where normalizing multiples on consensus 2021 earnings offered upside potential."

Here's a look at the results. The select stocks outperformed the market by 70%, and beat their industry peers by 59%.

Today, Wilson's shifted his focus to 2022 earnings.

"We started with stocks over $2B in market cap within the Russell 3000," he said. "From there, we ran a stylized screen that assumes NTM EPS rise into year end 2021 to match current consensus expectations for 2022 EPS. For multiples, we looked at each stock's average premium/discount to the S&P 500 from Jan 2017 to Feb 2020, the most recent expansion period, and assumed a reversion to that average premium/discount with a base S&P 500 multiple of 20.25x."

He continued: "In other words, we screened for stocks where rising forward earnings estimates can more than offset multiple normalization."

What Wilson found was a plethora of issues that looked primed to soar. In fact, if his measurements are correct, this basket of stocks has the potential to increase over 50% in value.

With all of that under consideration, Wilson provides 21 stocks that he thinks make for a timely purchase. The issues are listed in ascending order of potential price appreciation.

1. Western Digital

Ticker: WDC

2022 EPS: $5.99

Scenario return: 50.1%

Source: FactSet, Morgan Stanley Research.

2. South State Corporation

Ticker: SSB

2022 EPS: $5.56

Scenario return: 50.7%

Source: FactSet, Morgan Stanley Research.

3. Textron

Ticker: TXT

2022 EPS: $3.37

Scenario return: 50.7%

Source: FactSet, Morgan Stanley Research.

4. Capital One

Ticker: COF

2022 EPS: $12.15

Scenario return: 51.4%

Source: FactSet, Morgan Stanley Research.

5. Ally Financial

Ticker: ALLY

2022 EPS: $4.73

Scenario return: 56.3%

Source: FactSet, Morgan Stanley Research.

6. Synchrony Financial

Ticker: SYF

2022 EPS: $4.49

Scenario return: 58.2%

Source: FactSet, Morgan Stanley Research.

7. Umpqua Holdings

Ticker: UMPQ

2022 EPS: $1.37

Scenario return: 59.2% 

Source: FactSet, Morgan Stanley Research.

8. Capri Holdings Limited

Ticker: CPRI

2022 EPS: $3.81

Scenario return: 59.9%

Source: FactSet, Morgan Stanley Research.

9. Axis Capital Holdings

Ticker: AXS

2022 EPS: $5.29

Scenario return: 60.1%

Source: FactSet, Morgan Stanley Research.

10. PVH Corp

Ticker: PVH

2022 EPS: $7.39

Scenario return: 60.9%

Source: FactSet, Morgan Stanley Research.

11. Ralph Lauren

Ticker: RL

2022 EPS: $6.81

Scenario return: 68.2%

Source: FactSet, Morgan Stanley Research.

12. Tenga

Ticker: TGNA

2022 EPS: $2.47

Scenario return: 71.0% 

Source: FactSet, Morgan Stanley Research.

13. Kirby Corporation

Ticker: KEX

2022 EPS: $2.70

Scenario return: 77.3%

Source: FactSet, Morgan Stanley Research.

14. Exxon Mobil

Ticker: XOM

2022 EPS: $3.01

Scenario return: 77.4%

Source: FactSet, Morgan Stanley Research.

15. Phillips 66

Ticker: PSX

2022 EPS: $6.71

Scenario return: 77.6%

Source: FactSet, Morgan Stanley Research.

16. Wells Fargo

Ticker: WFC

2022 EPS: $3.18

Scenario return: 81.2%

Source: FactSet, Morgan Stanley Research.

17. Halliburton

Ticker: HAL

2022 EPS: $1.09

Scenario return: 87.6%

Source: FactSet, Morgan Stanley Research.

18. Devon Energy

Ticker: DVN

2022 EPS: $1.09

Scenario return: 91.2%

Source: FactSet, Morgan Stanley Research.

19. PacWest Bancorp

Ticker: PACW

2022 EPS: $3.08

Scenario return: 100.9%

Source: FactSet, Morgan Stanley Research.

20. Ovintiv

Ticker: OVV

2022 EPS: $1.34

Scenario return: 101.7%

Source: FactSet, Morgan Stanley Research.

21. Darling Ingredients

Ticker: DAR

2022 EPS: $4.11

Scenario return: 135.6%

Source: FactSet, Morgan Stanley Research.

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