Post-COVID Stock Picks: Morgan Stanley Highlights Its Recovery Plays

The stock market took a beating Thursday as rising 10-year Treasury yields spooked investors. But regardless of where the market goes next—and it has had a way of bouncing back from periodic selloffs—Morgan Stanley has a long-range plan for stock picking.

The investment house has identified under-loved stocks that should do well in a post-pandemic world, using a bunch of metrics it calls “quantamental.” In other words, it employs math-heavy methods, such as comparing valuations of stocks before the onset of the coronavirus and today, and also consults its analysts on various businesses.

“With the market broadly pricing a post-COVID-19 rebound, we look for the alpha opportunities where COVID-related benefits and damage appear mispriced,” the firm’s researchers wrote in a report.

Morgan Stanley does bring some cred to this exercise. Last spring, it correctly predicted a big turnaround from the pandemic plunge.

Some of the winners already are doing fairly well in a time of lockdowns and avoidance of much in-person activity such as shopping. UnitedHealth Group has enjoyed a 28% share boost over the past 12 months. For the fourth quarter of 2020, the health insurance giant reported a $2.52 earnings per share return, 12 cents above the analysts’ consensus, according to FactSet.

McDonald’s is another one that hasn’t done too, too badly. The stock is up just 8.6% over the past year. Same-store sales fell 1.6% in the fourth period, but the company has given optimistic future guidance. And it has floated several new products, like avocado toast and Beyond Meat sandwiches.

An example of a beaten-down stock that Morgan Stanley thinks will rally up ahead: Exxon Mobil. Indeed, the oil industry has gotten a boost for its shares as petroleum prices have climbed back. Exxon, which reported losses last year, has had a welcome stock surge since its November low. Meantime, it continues to be a target of environmental-minded investors.

Another kicked-around winner is Lamar Advertising, whose stock now is just 3% ahead of 12 months before the pandemic. The billboard company suffered from a shrinking of advertising at the outset of the pandemic. After bottoming out in last year’s third quarter, Lamar’s revenue and earnings began to perk up. Profits for the fourth quarter, however, still were off 33% from the largely pre-virus first period.

No surprise, among the 30 industries that Morgan Stanley examined, those with an online bent had the best prospects. “Increased digital consumption, distribution, and customer interaction,” the report said, “stand out as among the more durable trends.”

The study is the product of a collaboration that’s hunting for undervalued stars. Morgan Stanley’s quantitative research group joined forces with its fundamental equity analysts to spotlight stocks that could pleasantly surprise investors as an economic recovery gathers momentum.

“We’re bullish on the economic recovery, but think it’s largely in the price of the major index stock picking is key,” the research note indicated.

In search of potential winners, it compared earnings estimates with pre-pandemic ones to discover which companies had low expectations. The sectors with the most underappreciated stocks, by this method, were energy, financials, machinery, and media.

Then the analysts weighed in to ensure that this system’s findings made sense. “The market is pricing some degree of structural impairment, but we see upside from a cyclical recovery and/or wallet share reversion,” the note declared.