You’ve heard of 30 for 30. The highly-regarded ESPN documentary series that was started to commemorate the sports network’s 30th birthday but proved so successful ESPN kept on making the documentaries.
Well, how about 30 for ’23. Not the same ring, I know. But that’s what Morgan Stanley’s US Equity Strategy team has come up with. 30 stocks to consider owning through 2023 (see full list below).
We’ve pared it down to the hi-lights and a more manageable five for ’23 based on a few factors such as the highest estimated growth rates, profit margins and price appreciation.
Consider these stocks which could fare quite well through 2023.
Our US Equity Strategy team expects idiosyncratic factors to become more important from here.
In an environment in which stock-picking becomes key, we refresh a cornerstone Morgan Stanley analysis — ‘30 for 2023’: Quality stocks for a long- term holding period.
‘30 for 2023’ identifies our best long-term picks based on sustainability and quality of business model. Morgan Stanley’s Economics team is more bullish than consensus on the economic recovery.
Strong growth supports a bullish view on equities, but our US Equity Strategy team thinks that strong growth is largely in the price of the major indexes. Hence, they argue that stock picking will be essential for outperformance.
So which stocks should investors focus on? Our strategists’ work has long supported the view that quality outperforms in the long run.
Accordingly, we asked each of our US analysts to identify the highest-quality companies in their sector, the ones likely to strengthen their sustainable competitive advantage.
The main criterion is sustainability — of competitive advantage, business model, pricing power, cost efficiency, and growth.
We sought to identify the best franchises, not the most undervalued stocks.
Core still inflecting driven by strong Prime behavior with one-day ahead:
- AMZN’s core retail business continues to benefit from/drive the global e-commerce inflection.
- ~$113 billion of 4Q retail (non-Amazon Web Services) revenue came in 3% better than expected, driven by strong Prime behaviour
- We were also encouraged that AMZN’s logistics/fulfillment investments continue to position the company to grow its one-day business.
- Once e-commerce demand slows as the world re-opens, we see one-day delivery as the next driver to further AMZN’s share gains.
We continue to believe consensus is under-estimating the scalability of AMZN’s model and expect upward profit revisions even if we assume a large fulfillment/logistics build and material revenue deceleration starting in 2Q:20.
Risk Reward: Overweight / Price Target $4,200
Thermo Fisher Scientific (NYSE:TMO)
Focused expansion into high-growth markets coupled with best-in-class resiliency.
As a global life sciences leader, TMO serves ~$165 billion in addressable markets (across diagnostics & healthcare, industrial & applied, academic & government, and pharma & biotech verticals) that have historically grown in the 3-5% range annually.
Against this backdrop, TMO has been steadily increasing exposure to high-growth verticals such as Biopharma and emerging markets, with diversification and industry-leading scale allowing the company to rapidly adapt to macro events.
Concerns around a 2022+ ‘COVID cliff’ appear overblown.
- Turning to revenue dynamics in 2022+, we remain confident in TMO’s ability to convert vaccine/therapy manufacturing capacity to non-COVID-related activities once pandemic-driven demand normalizes.
- On the diagnostics front, the accelerated growth in the installed base provides TMO with the opportunity to drive menu expansion and gain share.
- We also note that TMO intends to deploy about $2 billion in net capital expenditure this year, to support capacity/capability expansions across the portfolio.
- Proven M&A track record.
With $10 billion in cash, $22 billion in debt, and $7B billion in expected free cash flow this year (and M&A a stated priority for capital deployment, following ~$40 billion of deals over the last decade), we expect TMO to aggressively pursue value-added transactions.
Risk Reward: Overweight / Price Target $575
Visa runs one of the largest centralized consumer payment networks globally, processing US$8.8 trillion in payment volume in FY20.
Its low-cost network, significant operating leverage, and enhanced risk detection capabilities enable it to price competitively vs. new players.
Visa is presently operating at scale, while market entrants are still trying to balance low network fees (to remain attractive vs. Visa) with continued investment in their platforms, high costs to drive user growth, and limited benefits of scale.
Visa is a key beneficiary of resilient consumer spending and consumers’ /businesses’ ongoing migration from cash to electronic payments.
Despite near-term headwinds from Covid-19, volumes on Visa’s network (ex-travel) have returned to pre-pandemic levels, and overall volumes should reaccelerate as markets open up and consumers return to spending in the economy.
Trends toward digitization should allow Visa’s growth to outpace overall global growth, while any rise in inflation should serve as a tailwind to the business.
Business to Business (B2B) payments represent a large untapped market, where innovation has significantly lagged the consumer payments market with an estimated 51% of B2B payments still made via cheques.
These tailwinds should be enough to support double-digit compounding earnings growth for Visa, driving mid-teens returns over the next few years.
Risk Reward: Overweight / Price Target $253
Estee Lauder (NYSE:EL)
Favourable Mix Shift Opportunity:
- EL is in the middle of a substantial mix shift, where it has become more exposed to favorable areas (skin care, China, and ecommerce/travel retail), driving its transformation to a higher-growth, higher- margin business.
- We expect favorable channels will account for 70% of sales mix by FY23 vs. ~45% in FY19.
- We are confident in our long-term revenue forecast of ~10% post-COVID compound annual growth rate (CAGR),, and we view our forecast as conservative.
Prestige Beauty Drives Outsized Long-Term Growth: Our outlook is also underpinned by a strong ~6-7% prestige beauty category growth in the last five years (pre-COVID), with favorable demographic trends from an emerging middle class and shift to premiumization.
Given EL is a 100% prestige pure-play with strong brand positioning, we see EL continuing to gain share.
Margin Expansion Opportunity: Our conviction in EL’s margin expansion potential is driven by:
(1) Revenue leverage with a post COVID recovery.
(2) Makeup rebounding as M&A pressure dissipates and revenue recovers, with margins expected to reach double digits in FY23.
(3) A favorable mix shift.
(4) Greater efficiency post COVID.
We expect EL will reach its “north star” target of 20% margins by FY23.
Risk Reward: Overweight / Price Target $331
The industry shift to streaming continues, and Netflix remains a clear leader.
We view Netflix’s scaled position in global streaming and its vertically integrated content creation as significant advantages in driving strong growth as the industry pivots toward streaming video consumption.
Substantial free cash flow (FCF) generation ahead:
- Netflix has scaled to a self-funded, highly FCF-generative business.
- This strengthens its competitive position and reduces risks to the business.
- Expanding financial capacity and balance sheet flexibility should result in excess cash to deploy.
Significant opportunity remains to grow share of large addressable market:
We believe Netflix’s opportunity comes from the $500 billion+ global TV market, of which total subscription streaming video on-demand (OTT) can still take meaningful share.
Content investments at scale support additional opportunities for Netflix to drive subscriber growth and pricing power.
Risk Reward: Overweight / Price Target $700
Here is Morgan Stanley’s complete list of 30 stocks for 2023.
GICS = Global Industry Classification Standard, CAGR = Compound Annual Growth Rate, EBIT = Earnings Before Interest & Taxes, RNOA = Return on Net Operating Assets (divide profit after taxes by net operating assets).
Disclosure: Regarding the above mentioned companies, within the last 12 months, Morgan Stanley may own 1% or more of their securities and/or their debt, has received compensation for non-investment banking products and services, is a market maker for some or all of the stocks, and has provided investment banking services. And some or all of the analysts who worked on this report may own some or all of the stocks.
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