MORGAN STANLEY: Buy these 20 dirt-cheap stocks with rock-solid global business models — including one that could rally over 100%
- European equities have outperformed MSCI’s All Country World Index since February.
- But the region is still not receiving love from global investors, Morgan Stanley analysts say.
- We list the bank’s top 20 stock picks with solid business models that are cheap versus global peers.
- See more stories on Insider’s business page.
European stocks have been unloved for some time, as investors piled into growth stocks that promised huge returns, particularly since early last year with the US market offering access to COVID-19 stay-at-home winners such as Zoom and Peloton.
Many market analysts expected that outlook to change as the recovery from the pandemic got underway. Investors looked to leverage as much of that momentum as they could by moving away from pricey so-called growth stocks, such as big technology companies, toward what are known as value stocks, which are more closely linked to the underlying economy, such as the infrastructure and banking sectors.
The European region is more heavily exposed to those sectors that benefit from economic recovery, such as industrials, retail, and transport, while the US market has more exposure to tech stocks, many of which were considered COVID-19 stay-at-home winners.
Yet even with the recovery fully gaining traction in developed markets, Europe’s relative flows remain at the low end of historical ranges compared with the record inflows that global equities have seen in the past three months, according to Morgan Stanley analysts.
In a report released Wednesday, Morgan Stanley analysts said global investors should consider the European region.
The Morgan Stanley analyst Matthew Garman said Europe had outperformed MSCI’s All Country World Index since February “yet there is little evidence of love for the region in a global context.”
Relative valuations are close to 10-year lows, and even when adjusted by sector Europe still looks cheap relative to MSCI’s All Country World Index, a leading global index, Garman said.
European equities have matched the performance of US blue-chip stocks so far this year. The STOXX 600 — an index of major European shares — is up about 11% in 2021, the same as the S&P 500.
Morgan Stanley said rising government-bond yields were driving a better period for European equities. Over the past 12 months, however, European shares have lagged their US peers. The STOXX 600 has gained about 30%, while the S&P 500 has risen by over 40% to record highs this month.
This could soon come to a halt, however.
Morgan Stanley’s US economists are predicting the Federal Reserve might start discussing slowing the pace of its asset purchases, or quantitative easing, when it meets in June, a tool it used to support the economy.
Many analysts believe quantitative easing has inflated asset prices and that tapering, in turn, could create a slowdown in the stock market.
“Assuming longer-term growth outlook remains favorable, such a period should represent a temporary pause/reset in a bull market rather than anything more extreme — over the long run, equity markets generally track underlying EPS trends,” Garman said.
Despite the potential pause to the bull-market rally in the US, the analysts expect Europe’s economic momentum to further boost European equity performance over the summer.
The analysts also emphasize that investors should worry less about the region’s sectoral mix compared with previous years.
“In each of the last 10 years, Europe’s sector composition has acted as a drag, with the lack of tech the biggest contributor to this,” Garman said.
The mix is now changing. Technology is now the biggest sector within the STOXX 50, an index of the 50 largest eurozone stocks.
“This ongoing change implies higher and less volatile trend EPS growth going forward, and should also make it easier for global investors looking for exposure to structural growth to engage with European equities,” Garman said.
Stock picks
Taking this outlook into consideration, the analysts highlight 20 stocks that are rated “buy” and look cheap compared with competitors elsewhere despite boasting leading global business models and comparable growth to their rivals.
The analysts said they felt it was important to highlight companies with strong global franchises, as their clients tell them they are seeking out European equity investments that are broader, with a global focus and that still look affordable.
Ticker: IFPJF
Sector: Media & entertainment
Upside to price target: 21%
Bull case upside to price target: 38%
Bear case downside to price target: -38%
Two-year forward price-to-earnings ratio (PE): 15.7x
Median global competitor’s 2-year forward PE: 27x
Premium to median global competitor’s 2-year forward PE: -42%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 41%
Median global competitor’s EPS compound annual growth rate (2021-2023): 16%
Source: Morgan Stanley
2. EssilorLuxottica
Ticker: ESLOF
Sector: Consumer durables & apparel
Upside to price target: 6%
Bull case upside to price target: 35%
Bear case downside to price target: 36%
Two-year forward price-to-earnings ratio (PE): 28.4x
Median global competitor’s 2-year forward PE: 35.8x
Premium to median global competitor’s 2-year forward PE: -21%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 11%
Median global competitor’s EPS compound annual growth rate (2021-2023): 14%
Source: Morgan Stanley
3. Flutter Entertainment
Ticker: PDYPF
Sector: Consumer services
Upside to price target: 12%
Bull case upside to price target: 63%
Bear case downside to price target: -35%
Two-year forward price-to-earnings ratio (PE): 35.5x
Median global competitor’s 2-year forward PE: 98x
Premium to median global competitor’s 2-year forward PE: -64%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 25%
Median global competitor’s EPS compound annual growth rate (2021-2023): -18%
Source: Morgan Stanley
4. Fresenius
Ticker: FSNUF
Sector: Healthcare equipment & services
Upside to price target: 18%
Bull case upside to price target: 93%
Bear case downside to price target: -35%
Two-year forward price-to-earnings ratio (PE): 10.5x
Median global competitor’s 2-year forward PE: 20.9x
Premium to median global competitor’s 2-year forward PE: -50%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 12%
Median global competitor’s EPS compound annual growth rate (2021-2023): 12%
Source: Morgan Stanley
5. Relx
Ticker: RELX
Sector: Commercial and professional services
Upside to price target: 9%
Bull case upside to price target: 31%
Bear case downside to price target: -24%
Two-year forward price-to-earnings ratio (PE): 19.3x
Median global competitor’s 2-year forward PE: 29.8x
Premium to median global competitor’s 2-year forward PE: -35%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 11%
Median global competitor’s EPS compound annual growth rate (2021-2023): 17%
Source: Morgan Stanley
6. SAP
Ticker: SAPGF
Sector: Software & services
Upside to price target: 8%
Bull case upside to price target: 32%
Bear case downside to price target: -30%
Two-year forward price-to-earnings ratio (PE): 22.4x
Median global competitor’s 2-year forward PE: 31.1x
Premium to median global competitor’s 2-year forward PE: -28%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 3%
Median global competitor’s EPS compound annual growth rate (2021-2023): 13%
Source: Morgan Stanley
7. Michelin
Ticker: MGDDF
Sector: Automobiles & components
Upside to price target: 1%
Bull case upside to price target: 20%
Bear case downside to price target: -32%
Two-year forward price-to-earnings ratio (PE): 10.7x
Median global competitor’s 2-year forward PE: 12.1x
Premium to median global competitor’s 2-year forward PE: -12%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 17%
Median global competitor’s EPS compound annual growth rate (2021-2023): 8%
Source: Morgan Stanley
8. Norsk Hydro
Ticker: NHYKF
Sector: Materials
Upside to price target: 22%
Bull case upside to price target: 102%
Bear case downside to price target: -39%
Two-year forward price-to-earnings ratio (PE): 12.3x
Median global competitor’s 2-year forward PE: 11x
Premium to median global competitor’s 2-year forward PE: 12%
Earning-per-share (EPS) compound annual growth rate (2021-2023): -1%
Median global competitor’s EPS compound annual growth rate (2021-2023): 5%
Source: Morgan Stanley
9. Novartis
Ticker: NVSEF
Sector: Pharmaceuticals, biotechnology, & life sciences
Upside to price target: 29%
Bull case upside to price target: 71%
Bear case downside to price target: -9%
Two-year forward price-to-earnings ratio (PE): 12.4x
Median global competitor’s 2-year forward PE: 12.9x
Premium to median global competitor’s 2-year forward PE: -4%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 8%
Median global competitor’s EPS compound annual growth rate (2021-2023): 7%
Source: Morgan Stanley
10. Akzo Nobel
Ticker: AKZOF
Sector: Materials
Base case upside to price target: 18%
Bull case upside to price target: 52%
Bear case downside to price target: -34%
Two-year forward price-to-earnings ratio (PE): 18.1x
Median global competitor’s 2-year forward PE: 23.8x
Premium to median global competitor’s 2-year forward PE: -24%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 12%
Median global competitor’s EPS compound annual growth rate (2021-2023): 10%
Source: Morgan Stanley
11. Rentokil Initial
Ticker: RKLIF
Sector: Commercial & professional services
Base case upside to price target: 18%
Bull case upside to price target: 52%
Bear case downside to price target: -24%
Two-year forward price-to-earnings ratio (PE): 27.1x
Median global competitor’s 2-year forward PE: 42.4x
Premium to median global competitor’s 2-year forward PE: -36%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 10%
Median global competitor’s EPS compound annual growth rate (2021-2023): 12%
Source: Morgan Stanley
12. Ryanair Holdings
Ticker: RYAOF
Sector: Transportation
Base case upside to price target: 2%
Bull case upside to price target: 33%
Bear case downside to price target: -58%
Two-year forward price-to-earnings ratio (PE): 12.6x
Median global competitor’s 2-year forward PE: 14.2x
Premium to median global competitor’s 2-year forward PE: -11%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 369%
Median global competitor’s EPS compound annual growth rate (2021-2023): N/A
Source: Morgan Stanley
13. ArcelorMittal
Ticker: AMSYF
Sector: Materials
Base case upside to price target: 13%
Bull case upside to price target: 56%
Bear case downside to price target: -45%
Two-year forward price-to-earnings ratio (PE): 8.9x
Median global competitor’s 2-year forward PE: 11.3x
Premium to median global competitor’s 2-year forward PE: –21%
Earning-per-share (EPS) compound annual growth rate (2021-2023): -28%
Median global competitor’s EPS compound annual growth rate (2021-2023): -13%
Source: Morgan Stanley
14. bioMérieux
Ticker: BMXMF
Sector: Healthcare equipment & services
Base case upside to price target: 34%
Bull case upside to price target: 78%
Bear case downside to price target: -19%
Two-year forward price-to-earnings ratio (PE): 28.2x
Median global competitor’s 2-year forward PE: 26x
Premium to median global competitor’s 2-year forward PE: 8%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 3%
Median global competitor’s EPS compound annual growth rate (2021-2023): 7%
Source: Morgan Stanley
15. Wolters Kluwer
Ticker: WOLTF
Sector: Commercial & professional services
Base case upside to price target: 4%
Bull case upside to price target: 14%
Bear case downside to price target: -34%
Two-year forward price-to-earnings ratio (PE): 21.9x
Median global competitor’s 2-year forward PE: 28.4x
Premium to median global competitor’s 2-year forward PE: -23%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 7%
Median global competitor’s EPS compound annual growth rate (2021-2023): 16%
Source: Morgan Stanley
16. Vinci
Ticker: VCISF
Sector: Capital goods
Base case upside to price target: 9%
Bull case upside to price target: 38%
Bear case downside to price target: -16%
Two-year forward price-to-earnings ratio (PE): 14.2x
Median global competitor’s 2-year forward PE: 15.8x
Premium to median global competitor’s 2-year forward PE: -10%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 24%
Median global competitor’s EPS compound annual growth rate (2021-2023): 16%
Source: Morgan Stanley
17. Amundi
Ticker: AMUN
Sector: Diversified financials
Base case upside to price target: 15%
Bull case upside to price target: 72%
Bear case downside to price target: -39%
Two-year forward price-to-earnings ratio (PE): 12.6x
Median global competitor’s 2-year forward PE: 19.2x
Premium to median global competitor’s 2-year forward PE: -34%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 7%
Median global competitor’s EPS compound annual growth rate (2021-2023): 11%
Source: Morgan Stanley
18. Amadeus IT Group
Ticker: AMADF
Sector: Software & services
Base case upside to price target: 23%
Bull case upside to price target: 72%
Bear case downside to price target: -39%
Two-year forward price-to-earnings ratio (PE): 31.5x
Median global competitor’s 2-year forward PE: 47x
Premium to median global competitor’s 2-year forward PE: -33%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 190%
Median global competitor’s EPS compound annual growth rate (2021-2023): 55%
Source: Morgan Stanley
19. AXA
Ticker: AXAHF
Sector: Insurance
Base case upside to price target: 2%
Bull case upside to price target: 39%
Bear case downside to price target: -63%
Two-year forward price-to-earnings ratio (PE): 7.9x
Median global competitor’s 2-year forward PE: 12.3x
Premium to median global competitor’s 2-year forward PE: -36%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 6%
Median global competitor’s EPS compound annual growth rate (2021-2023): 14%
Source: Morgan Stanley
20. Sanofi
Ticker: SNYNF
Sector: Pharmaceuticals, biotechnology & life sciences
Base case upside to price target: 19%
Bull case upside to price target: 44%
Bear case downside to price target: -19%
Two-year forward price-to-earnings ratio (PE): 12.4x
Median global competitor’s 2-year forward PE: 13x
Premium to median global competitor’s 2-year forward PE: -5%
Earning-per-share (EPS) compound annual growth rate (2021-2023): 8%
Median global competitor’s EPS compound annual growth rate (2021-2023): 7%
Source: Morgan Stanley
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