Global markets have been slammed by a slew of macro headwinds, but Morgan Stanley sees opportunities for investors to pile into “fallen angels” — stocks which the bank thinks have sold off materially and now look attractive. With the MSCI Europe down nearly 14% this year, Morgan Stanley believes European stocks have been oversold, with the index now trading below its long-run median forward price-to-earnings — an important metric used by traders to gauge the value of an asset. But despite the oversold conditions and lower valuations, the bank said it remains cautious on European stocks. “On balance, we view equity valuations as reasonably attractive rather than especially cheap, particularly since the fundamental picture for corporate earnings is starting to look quite challenged,” Morgan Stanley’s strategists, led by Ross MacDonald, said in a research note on May. 24. However, the bank acknowledged that there are pockets of opportunities for its list of “fallen angels.” “We acknowledge that for a number of stocks and sectors underperformance has already been extreme. Given this, we think investors are likely to be sharpening their pencils on single names where recession risks are starting to look priced in / risk-reward looks appealing,” MacDonald said. “Although we are tactically cautious, we think there is growing appetite from investors to build positions in ‘good companies at a better price’ — stocks where recent underperformance has created an attractive entry point for patient investors,” he added. CNBC Pro spotlights five of Morgan Stanley’s “fallen angels.” Capgemini Morgan Stanley sees French consulting firm Capgemini as a “safe haven” stock at an “attractive valuation.” The bank noted that the company has a track record of being relatively defensive and has performed well through the coronavirus pandemic. Capgemini is also exposed to structural tech themes, such as demand acceleration for digital transformation and digital manufacturing/industry 4.0. The bank sees the stock as attractively valued for that growth opportunity and has ascribed a price target of 237 euros ($254) on the stock. This implies a potential upside of 31.3% to the stock’s closing price of 180.5 euros on May 31. Deutsche Post The bank believes that e-commerce is a secular trend that is “here to stay” — despite the normalization in the sector this year and a possible slowdown in consumption. Morgan Stanley noted that Deutsche Post has invested in automating and digitizing its operations, as well as expanding its customer base — all of which had resulted in the growth of both its capacity and addressable market. The stock also looks cheap relative to its peers, MacDonald noted, with the stock trading at a discount to its peers in the U.S. — a discount of 45% and 10% to UPS and Fedex , respectively. “We find these discounts to be excessive,” he added. EssilorLuxottica Morgan Stanley believes the company’s revenue profile is the most resilient among its peers. “In light of the market’s concerns around the vulnerability of consumer sentiment, we see EssilorLuxottica as one of the safest plays for consumer investors, given its healthcare-driven revenue profile,” MacDonald said. The bank has forecast the company to achieve compounded five-year earnings growth of 11%. This will mainly be driven by synergies and product innovation. The bank believes that the company offers “a far greater level of [earnings] visibility” relative to other consumer and brand names. LVMH The bank said LVMH remains a “top pick” in a sector that has been de-rating since late-2021, describing the company as a “structural market share gainer” in almost all the businesses where it operates. Moreover, LVMH is the only player with exposure to the reopening trade in the luxury space, the bank added. The bank said it remains “upbeat” on the company’s growth outlook and believes it should “hold up better” than peers in an adverse environment. SAP Despite the market rotation away from growth and technology stocks, Morgan Stanley said its remains “confident” that SAP can perform “relatively well” in a slowdown given its recurring revenue mix and product offering that can help companies reduce costs. “SAP offers a mix of high recurring revenues, strong product and market demand drivers and a valuation now below previous floor levels,” MacDonald said. He also continues to see a “positive catalyst” in SAP’s cloud business growth.
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Global markets have been slammed by a slew of macro headwinds, but Morgan Stanley sees opportunities for investors to pile into “fallen angels” — stocks which the bank thinks have sold off materially and now look attractive.