- 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.
“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.
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