Quality stocks have been out of favor for a while now. The category includes names that have been slammed but that have bright outlooks—and those are potential buys.
There are many ways to define a quality stock. Some are in the defensive sectors of healthcare, consumer staples, and utilities, which are always in demand even as households and businesses cut their budgets.
Others are so competitive, even dominant, in their industries that they have consistent pricing power, enabling them to maintain high profit margins.
Many of the stocks have performed poorly. The Health Care Select Sector SPDR exchange-traded fund (ticker:
), Vanguard Consumer Staples ETF (
Utilities Select Sector SPDR Fund
(XLU) are down between 7% and 13% from their record highs. And the VanEck MSCI International Quality Exchange-Traded Fund (QUAL) is down about 14% from its highest point.
All of the indexes and funds have underperformed the
‘s 7% gain this year. The overarching reason is because, last year, these names outperformed as the market feared the Federal Reserve could trigger a recession with its interest-rate increases.
But this year, companies that have seen their profit forecasts drop the most—and could subsequently see the swiftest recovery—have seen their stocks outperform. This has left some quality stocks on sale. It is a perfect opportunity for investors interested in names that might have a particularly bright future.
strategists screened for these stocks. They looked for names down at least 10% in the past year as of Monday, but that have also underperformed their relevant S&P 500 sectors by at least five percentage points in that span. Of those, the strategists looked at the ones rated ‘Overweight’ by the bank’s analysts and with price targets representing at least 20% upside from current levels. The companies’ market capitalizations had to be at least $1 billion.
Here are four stocks that made the list:
Amazon.com (AMZN): It is down more than 35% in the past year as higher interest rates make future profits less valuable in current terms, a problem for the company because it is valued on the basis that much of its profit will come many years in the future. Lower margins from rising labor and logistics costs haven’t helped.
But Morgan Stanley analysts see more than 50% upside from the stock’s current level. Continued growth of cloud sales to new customers and its ability to leverage its e-commerce platform to sell more advertisements should keep sales growing about 13% to near $630 billion in 2024, according to FactSet. Profit margins should re-expand, helping earnings per share under generally accepted accounting principles to rise 61%. If rates stabilize and the company executes, there is tons of potential for gains.
Match Group (MTCH): The stock is down about 62% in the past year. While the company’s operating margin is usually about double that of the aggregate on the S&P 500, it has had trouble following through on its user and monetization growth strategy recently. Higher rates have hurt and so has a stronger dollar. Morgan Stanley analysts see about 90% upside—so long as the company can achieve expected EPS growth and the dollar doesn’t surge again.
Snowflake (SNOW): Its stock is down about 42% in the past year. Higher rates have crushed the company’s valuation. It still trades at just under 20 times expected 2023 sales of $2.9 billion because top-line growth is expected at above 30% for years to come, while margins expand and EPS could explode higher. With the multiple much lower than it used to be, Morgan Stanley analysts see 38% upside to the stock, especially since analysts’ EPS forecasts have only risen in the past year.
Centene (CNC): The healthcare services company has seen its stock fall about 13% in the past year, as 2023 EPS estimates have dipped. But analysts expect premium revenue to rise to about $165 billion by 2027 from just under $145 billion in 2022. Morgan Stanley analysts see a potential 44% gain for the share price.
Give these stocks a look.
Write to Jacob Sonenshine at [email protected]
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