MORGAN STANLEY: Buy these 6 stocks poised for gains as the economic recovery continues and Congress mulls more coronavirus stimulus

  • Morgan Stanley's Mike Wilson is bullish on a V-shaped economic recovery — if another round of stimulus is passed by Congress.
  • He recommended six stocks in the industrial sector set up for gains as the economy begins a new expansion cycle.
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Morgan Stanley strategist Andrew Sheets recently warned that the fate of the stock market — and the economy — in the months ahead are "unusually dependent" on Congress and President Donald Trump moving another round of fiscal stimulus to the finish line.

Sheets recommended investors shift into cyclical stocks, which benefit from an economic expansion's early momentum, in the event that another stimulus package is indeed passed. 

In a Monday note, Sheets' colleague, Morgan Stanley's Chief US Equity Strategist Mike Wilson, reiterated that he, too, is bullish on an economic recovery, and is confident that another round of stimulus will come to fruition.

The prospects of Congress passing another coronavirus relief bill before the November elections remain uncertain. On Thursday, Senate Democrats unanimously voted against a slimmed-down GOP stimulus plan that extended federal unemployment benefits and granted aid to small businesses but left out direct payments to individuals. 

Despite the political gridlock, Wilson is recommending that investors look toward cyclicals as a play on the economy's recovery. 

"We're bulls on the economy but think equities at the index level have largely priced in a good portion of the rebound. Further upside from here is about earnings moving higher and we expect valuations to be a headwind," he said.

"We continue to prefer cyclicals over defensives, small over large, and companies that can exhibit strong operating leverage to an ongoing recovery."

Within cyclicals, Wilson is overweight on the industrials sector especially. He and his team of analysts pointed to six "high conviction" industrial stocks to buy to profit from the early-cycle environment. They are listed below in no particular order with the bank's reasoning behind each recommendation.

1. Avis

Ticker: CAR

Price Target: $40

Comment: "Sequential improvements in the used car market and travel volumes drive our OW rating. We believe Avis has sufficiently addressed key issues in relation to liquidity, cost actions and fleet reductions in order to ensure it is in a position of strength coming out of COVID-19."

Source: Morgan Stanley

 

2. Deere & Company

Ticker: DE

Price Target: $247

Comment: "DE is our top pick in US Machinery (with Ag Equipment also our preferred vertical within Machinery), with a combination of secular growth drivers (Precision Ag), cyclical support and cycle-over-cycle margin improvement driving a path for multi-year growth."

Source: Morgan Stanley

3. Fortive

Ticker: FTV

Price Target: $83

Comment: "Fortive's general industrial markets, profitable niche products, and the ability to augment growth through M&A check the right boxes for what we believe will outperform in the next cycle. Additionally, recent performance of its core businesses appears to be restoring investor confidence in the quality of the portfolio after a tough 2019."

Source: Morgan Stanley

 

4. Knight-Swift

Ticker: KNX

Price Target: $55

Comment: "As the largest Truckload (TL) carrier with significant spot exposure, KNX is our favored way to play our bullish view on TL fundamentals in 2H20-21. While some investors are already anticipating the "2nd derivative trade" we don't think traditional wisdom applies to this cycle as supply headwinds should limit the typical capacity surge as the market heats up. This should meaningfully raise the floor/peak on rates and limit the downside when the cycle does roll, which we don't expect until well into 2021 at the earliest. KNX fundamentals and valuation have room to run until then."

Source: Morgan Stanley

 

5. Teck Resources

Ticker: TECK

Price Target: $12.50

Comment: "We like Teck for its exposure to copper, one of our preferred commodities globally, and see a substantial long-term expansion in volumes and EBITDA through its QB2 brownfield project. We expect healthy levels of FCF generation from 2023 onward."

Source: Morgan Stanley

 

6. TransDigm Group

Ticker: TDG

Price Target: $772

Comment: "We view TransDigm as teh most defensible business model in commercial aerospace. In the past few years, management have overcome challenges to its business model from a number of angles. We are positive on TransDignm, particularly as recovery in global air traffic would be favorable for TransDigm's core profit maker, the aftermarket."

Source: Morgan Stanley

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