Morgan Stanley identifies 28 underappreciated, high-quality stocks to own as the market’s most expensive names are due to continue underperforming

  • Expensive stocks have seen their valuations compress some in recent months. 
  • According to Morgan Stanley’s Mike Wilson, that’s bound to continue going forward.
  • Wilson and his team shared a list of 28 reasonably priced quality stocks to avoid the headwind. 
  • See more stories on Insider’s business page.

Investors last year piled into growth stocks amid the low interest rate environment. The insatiable demand for the names drove up some valuations to neck-straining heights, and pushed the gap between growth and cheaper value names towards its widest ever.

But investor flows have changed this year, with money coming out of the most expensive names and pouring into more cyclical stocks as markets digest rising rates and a clearer path to an economic recovery.

According to Morgan Stanley’s Chief US Equity Strategist Mike Wilson, this shift out of expensive names is bound to continue in the months ahead as friendly monetary policy hits its top.

The breadth and pace of upwards earnings revisions are also set to begin falling, a bad sign for highly valued names and the market more broadly. This is because weaker earnings make it difficult to continue justifying steep valuations. Wilson said this makes the market “vulnerable” to a 10-15% correction in the next six months. 

“Much of our mid-cycle transition call is based on the arrival of the peak rate of change in both growth and policy,” Wilson said in note to clients on Monday. “The adjustment for markets means lower valuations, a process that began in 1Q  for the most expensive stocks.

“We think that de-rating will now broaden out, which means investors must find stocks where expectations can still rise more than P/Es fall, or about 15% in our view,” he added.

Some factors to look at when identifying these names, Wilson said, are quality — meaning the firm is fundamentally reliable — and a reasonable valuation.

In the note, he highlighted an updated list of 28 stocks put together by the bank’s quant team that are both considered quality and reasonably priced. Those included do not have valuations that are in the top third in terms of valuation out of the biggest 1,000 firms by market cap, and also are not rated “underweight” by the bank.

The stocks are listed below in order of their sector. 

1. Activision Blizzard

Ticker: ATVI

Sector: Communication Services

Market cap: $75.5 billion

Source: Morgan Stanley

2. Alphabet

Ticker: GOOGL

Sector: Communication Services

Market cap: $1.58 trillion

Source: Morgan Stanley

3. Electronic Arts

Ticker: EA

Sector: Communication Services

Market cap: $41.1 billion

Source: Morgan Stanley

4. Facebook

Ticker: FB

Sector: Communication Services

Market cap: $943.5 billion

Source: Morgan Stanley

5. Columbia Sportswear

Ticker: COLM

Sector: Consumer Discretionary

Market cap: $6.9 billion

Source: Morgan Stanley

6. Polaris

Ticker: PII

Sector: Consumer Discretionary

Market cap: $8 billion

Source: Morgan Stanley

7. Ollie’s Bargain Outlet

Ticker: OLLI

Sector: Consumer Discretionary

Market cap: $5.2 billion

Source: Morgan Stanley

8. O'Reilly Automotive

Ticker: ORLY

Sector: Consumer Discretionary

Market cap: $36.9 billion

Source: Morgan Stanley

9. Ross Stores

Ticker: ROST

Sector: Consumer Discretionary

Market cap: $44.8 billion

Source: Morgan Stanley

10. TJX

Ticker: TJX

Sector: Consumer Discretionary

Market cap: $81 billion 

Source: Morgan Stanley

11. Sysco

Ticker: SYY

Sector: Consumer Staples

Market cap: $41.1 billion

Source: Morgan Stanley

12. SEI Investments

Ticker: SEIC

Sector: Financials

Market cap: $9 billion

Source: Morgan Stanley

13. AON

Ticker: AON

Sector: Financials

Market cap: $57.2 billion

Source: Morgan Stanley

14. HCA Healthcare

Ticker: HCA

Sector: Healthcare

Market cap: $72 billion 

Source: Morgan Stanley

15. IQVIA

Ticker: IQV

Sector: Healthcare

Market cap: $45.5 billion 

Source: Morgan Stanley

16. PRA Health Sciences

Ticker: PRAH

Sector: Healthcare

Market cap: $11 billion

Source: Morgan Stanley

17. Grainger (WW)

Ticker: GWW

Sector: Industrials

Market cap: $23.9 billion

Source: Morgan Stanley

18. Lincoln Electric

Ticker: LECO

Sector: Industrials

Market cap: $7.6 billion

Source: Morgan Stanley

19. Masco

Ticker: MAS

Sector: Industrials

Market cap: $15.3 billion

Source: Morgan Stanley

20. Smith (A.O.)

Ticker: AOS

Sector: Industrials

Market cap: $11.4 billion

Source: Morgan Stanley

21. Triniet Group

Ticker: TNET

Sector: Industrials

Market cap: $5 billion

Source: Morgan Stanley

22. Hunt (JB) Transport Services

Ticker: JBHT

Sector: Industrials

Market cap: $18.2 billion

Source: Morgan Stanley

23. Skyworks Solutions

Ticker: SWKS

Sector: Information Technology

Market cap: $28.2 billion

Source: Morgan Stanley

24. Dropbox

Ticker: DBX

Sector: Information Technology

Market cap: $11.1 billion

Source: Morgan Stanley

25. CDW

Ticker: CDW

Sector: Information Technology

Market cap: $23.4 billion

Source: Morgan Stanley

26. Eagle Material

Ticker: EXP

Sector: Materials

Market cap: $6.2 billion

Source: Morgan Stanley

27. RPM International

Ticker: RPM 

Sector: Materials

Market cap: $12.1 billion

Source: Morgan Stanley

28. Scotts Miracle-Gro

Ticker: SMG

Sector: Materials

Market cap: $12 billion

Source: Morgan Stanley

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