Correctly choosing stocks is especially vital now, according to Morgan Stanley.
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Morgan Stanley isn't sold on US stocks, which have clawed back much of their losses.
Active investing will become increasingly important as gaps between companies widen.
Here are 20 top stocks to own now, according to Morgan Stanley.
Although US stocks have enjoyed an impressive rally, Morgan Stanley's top minds are on edge.
Investors, and market volatility, have calmed down since early August as the S&P 500 mounted a 8.6% comeback from its lows. In that span, the CBOE Volatility Index has been more than cut in half, though the VIX rose slightly last week.
Upbeat labor market and retail sales reports sparked the buying spree, but Morgan Stanley strategists led by Michelle Weaver noted that economic data is still sending mixed messages. Until there's more clarity on the growth outlook, the firm is sticking with its risk-off approach.
"The future remains uncertain as we look to the upcoming jobs report to provide confidence that near term risks to growth have subsided," Weaver wrote in an August 21 note. "Careful stock selection based on idiosyncratic factors is especially important in this type of environment."
Why stock-picking is in vogue — and 20 top ideas
Without an obvious economic narrative, investors must take a closer look at the merits of individual companies instead of simply shifting their portfolios toward cyclicals or defensives.
Stocks are sinking or swimming on their own merits, as Morgan Stanley found that about 63% of returns for S&P 500 components are explained by company-specific factors. That's an unusually high mark and is in the 80th percentile historically, the firm noted. The dynamic holds up across all sectors and is especially notable after firms report earnings.
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While the cost of picking stocks poorly is higher, Weaver noted that active managers who choose wisely have a better chance of outperforming their index.
"Elevated stock specific risk creates a stronger environment for stock-picking," Weaver wrote. "The market is also showing signs of broadening out, which would be supportive for a wider group of equities."
Larger post-earnings moves are separating winners and losers in markets.
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However, Morgan Stanley recommends keeping a quality bias by sticking with larger stocks, plus those that are defensive and can hold up in any market environment.
In the note, strategists at the Wall Street giant listed 20 companies across sectors and industries that are their analysts' favorite ideas right now. These so-called high-conviction names have up to 62% upside, based on Friday's closing prices.
Below are those 20 top ideas from Morgan Stanley, along with each one's ticker, market capitalization, sector, industry, and Morgan Stanley's price targets and the upside to them as of August 23.
Thesis: "LifeStance is the largest player in outpatient behavioral health, yet is only ~3% penetrated in this $35bn commercial market, with an opportunity to expand the TAM to $64 billion by moving into government pay longer term. After an extended period of setbacks in the business, recent management changes and a pivot in strategy to focus on margin expansion is beginning to resonate."
Thesis: "The right cycle for SLB: SLB's portfolio, which is oriented towards int'l and offshore markets, is set to benefit from substantial demand growth in core oil-producing areas. We think the OFS industry's substantial capacity attrition will continue to drive pricing growth as the cycle evolves."
Thesis: "We believe TSLA can leverage its EV cost leadership to expand user base and generate a higher % of revenue from recurring/high-margin software & services. … We forecast TSLA's services EBITDA to account for 34% of total EBITDA by 2030 & 63% by 2040. Includes: FSD, infotainment, upgrades, charging, maintenance, etc."
Thesis: "We favor MTB for its excess capital and liquidity position, which makes it more resilient to a challenging macro and regulatory environment versus peers. ... Valuation is also attractive, trading at a sizable P/E discount relative to its historical average."
Thesis: "We forecast legal US sports betting & iGaming to increase from <$1.5B in 2019 to ~$27B in 2026 as more states legalize and spend per capita rises. Forecast DKNG to maintain top tier share, 30% in OSB, and 27% in iGaming in 2026."
Thesis: "Toast's best-of-breed platform integrates POS hardware, software, and payments into an end-to-end Restaurant Operating System. Timing is opportune with restaurant technology adoption on the rise. We forecast rapid scaling, but see this well reflected in valuation."
Thesis: "We view NDAQ as a multi-year re-rating story given its ongoing strategic shift to more recurring revenues along key structural growth zones that should support 9% revenue and 11% EBITDA CAGR over the next three years."
Thesis: "In Connectivity & Platforms, we believe continued runway in broadband and wireless will offset video declines, with the mix shift driving rising margins and falling capital intensity. At Content & Experiences, we believe temporary headwinds from macro have pressured CMCSA multiples, resulting in an attractive risk/reward."
Thesis: "Apple is on the cusp of its largest device upgrade cycle ever, as the launch — and limited backward compatibility — of Apple Intelligence, improves upgrade cycles/new user acquisition, and accelerates replacement cycles, resulting in a record-breaking FY25/FY26 cycle that is underappreciated by the market today. When combined with consistent, double-digit services growth and gross margins that are flat to expanding, we believe Apple can generate $8.70 of earnings power in FY26, 7% above Consensus."
Thesis: "Spotify is the market leader in subscription streaming, with growing user engagement, and we believe scale brings an opportunity for ancillary revenues including podcasts and artist/label tools."
Thesis: "Expect upward revisions as the new management team executes on its strategic plan to simplify the business, cut costs, invest in innovation, and drive core topline growth. Early signs of progress in the turnaround include margin inflection, share losses abating, and cost-cutting efforts running ahead of plan, with our work indicating 20% margins are within reach in 2025 vs. the prior 2027 target."
Thesis: "LLY has the most robust new product cycle (and hence growth) outlook in Pharma as the company could launch five new drugs over the next two years (across large end markets such as diabesity, Alzheimer's disease, cancer, and immunology)."
Thesis: "FTAI Aviation is a relatively under-the-radar aviation leasing and Maintenance, Repair, and Overhaul (MRO) company with positive optionality on Parts Manufacturer Approval (PMA) in the hot section of the jet engine. FTAI built a unique business model to allow the company to maximize profits in arguably the most attractive part of the aerospace aftermarket today: the CFM-56 jet engine."
Thesis: "We expect NVDA's Data Center business to drive much of the growth over the next five years, as enthusiasm for generative AI has created a strong environment for AI/ML hardware solutions — NVDA's being one of the most important. Incremental opportunities in AI/ML software & services, networking, and ADAS can drive growth even higher."
Thesis: "More modest than expected downturn in HD trucks in the US, solid growth in MD, and strong execution of Accelera growth strategy result in better than expected sales and margins, driving positive earnings revisions. AI tailwinds for power generation also boost sentiment. Combined with a rebound in US Class 8 orders shifts investor focus to a stronger 2025/26, driving shares higher."
Thesis: "Driven by end market strength and share gains in Biopharma and emerging markets, we expect TMO to meaningfully outpace peers, with diversification and scale embedding best-in-class resilience and flexibility. M&A optionality further support[s] our overweight thesis."
Thesis: "In the near term, we believe Natera is well positioned to maintain its dominant position in reproductive health with its leading products Panorama (for non-invasive prenatal testing or NIPT) and Horizon (for carrier screening) and poised to benefit from the recent ACOG practice bulletin to recommend offering NIPT to all women regardless of baseline risk and an eventual expansion of reimbursement."
Thesis: "We expect MSD organic sales growth, driven by strong pricing and positive strategy changes, not fully priced into valuation, and continued EPS upside in 2024 vs conservative guidance."
Thesis: "UnitedHealth Group is the number one Medicare Advantage player with ~28% market share, the number three Medicare PDP player with ~17% market share, and the number two commercial player with ~15% market share. United's model is enhanced via vertical integration with its OptumRx PBM platform, which is one of the three largest PBMs in the country."
Thesis: "We are OW PEP, as we see it as materially undervalued vs strong LT pricing power, underappreciated international growth, a solid LT business model, and with a clear inflection ahead as the company cycles through short term transient factors."
