MORGAN STANLEY: Buy these 9 top-rated stocks now for market-beating returns of 15% or more over the next 3 months

  • The benchmark S&P 500 index is close to all-time highs again, and Morgan Stanley strategist Boris Lerner says stock-picking is becoming more important as equities stop swinging in unison.
  • Lerner and his team just updated their MOST stocks, a group they believe is going to beat the market handily over the next three months.
  • The stocks rate highly based on advanced quantitative measurements, and carry "Buy" ratings from Morgan Stanley's analysts.
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In spite of everything that has happened in the last six months, the stock market is on the verge of setting record highs again.

It's inspired reactions ranging from confusion to pessimism that the rally will continue to intense optimism that the recovery is just getting started. 

One much-discussed element of the recovery is that a lot of the market's recent gains are concentrated in a relatively small number of stocks.

"Only 42% of the S&P 500 constituents have beat the index return in July, which ranks this month in the 9th percentile relative to the last 20 years," wrote Morgan Stanley Quantitative Strategist Boris Lerner in a recent note.

That leaves a lot of room for improvement in a lot of stocks. At the same time, one of the unusual features of the 2020 stock market is fading. That's the high correlation of stocks, or the fact that they've tended to rise together or fall together.

"When stock correlation is high, there is less discernible benefits from diversification whereas low levels of stock correlation can present better opportunities for active stock pickers," he said.

With correlations falling, he's identifying some of the stocks that have the best shot at standing out. The firm's MOST model uses quantitative measurements to find the stocks that can offer the best risk-adjusted return over the next three months.

Lerner winnows the field further and introduces a human element by picking the stocks that rank in the top 20% according to the MOST model and are also rated "Overweight" by Morgan Stanley's analysts. 

The following stocks fit that bill and have upside of at least 15% based on Morgan Stanley's 12-month price targets. They're ranked from lowest to highest based on the amount of upside to that figure relative to their Wednesday closing prices.

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9. American Electric Power

Ticker: AEP

Sector: Utilities

Price target: $100

Upside to target: 18.8%

Source: Morgan Stanley

8. General Electric

Ticker: GE

Sector: Industrials

Price target: $18

Upside to target: 19.0%

Source: Morgan Stanley

7. Raymond James Financial

Ticker: RJF

Sector: Financials

Price target: $91

Upside to target: 19.3%

Source: Morgan Stanley

6. AT&T

Ticker: T

Sector: Telecommunication services

Price target: $36

Upside to target: 19.3%

Source: Morgan Stanley

5. Schlumberger

Ticker: SLB

Sector: Energy

Price target: $25

Upside to target: 22.8%

Source: Morgan Stanley

4. Fox

Ticker: FOXA

Sector: Communication services

Price target: $31

Upside to target: 24.4%

Source: Morgan Stanley

3. Williams Cos.

Ticker: WMB

Sector: Energy

Price target: $25

Upside to target: 30.7%

Source: Morgan Stanley

2. Citizens Financial Group

Ticker: CFG

Sector: Financials

Price target: $36

Upside to target: 35.9%

Source: Morgan Stanley

1. Exelon

Ticker: EXC

Sector: Utilities

Price target: $59

Upside to target: 52.4%

Source: Morgan Stanley

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