- Morgan Stanley’s annual Vintage Values stock list combines fundamental and quantitative analysis.
- This year’s selection reveals the top 15 stock picks by the firm’s North American analysts.
- On average, the 15 stocks have a higher cash flow and better earnings revisions than the market.
Amid a prolonged fight against rising prices and a looming economic downturn, it’s a tough world right now for investors.
The Federal Reserve’s hardline stance against inflation at Friday’s Jackson Hole meeting sent stocks tumbling, finishing off a rally that began in mid-June. Fears around heightened uncertainty and a potential recession also solidified as the Cboe Volatility Index (VIX), a traditional measure of market volatility, spiked upwards.
When realizing gains is as difficult as it is right now, Morgan Stanley’s Vintage Values list comes as a welcome respite. The list, published annually, provides a selection of the firm’s top equity recommendations for a one-year buy-and-hold investment horizon.
“In compiling the list, our stock-selection framework blended our analysts’ fundamental views with quantitative analysis,” wrote a team of analysts led by Morgan Stanley Chief Investment Officer and Chief US Equity Strategist Mike Wilson in the report, published on August 24.
Last year’s Vintage Values list, which covered August 2021 to August 2022, outperformed the S&P 500 index by 100 basis points. Of the 50 stocks recommended this year by Morgan Stanley’s North America analysts, only the top 15 were included in the list.
To narrow down the selection, each of the suggested stocks were extensively assessed to screen its “macro exposure, industry positioning, valuation, and risk-reward profile, paying particular attention to the skew of the analysts’ bull- and bear-case valuation estimates,” Wilson explained.
Next, the stocks were cross-checked for their quantitative quality and environmental, social, and governance scores. To narrow down the final 15, the list was considered against Wilson’s high-level equity sector allocations so that its weightings would match his current positioning, which includes an overweight position in the healthcare and real estate sectors.
Morgan Stanley’s top 15 stocks to buy and hold over the next 12 months
On the topline, Morgan Stanley’s Vintage Values list prefers high-quality stocks. With the average stock on the list trading 11% more expensive than the market on forward price-to-earnings ratios and 17% more expensive on price-to-sales ratios, it may seem that the list of stocks is trading at a premium.
But according to Wilson, the list is “materially less expensive” than the market when accounting for key cash flow-based valuation measures like the enterprise value-to-operating cash flow, and also carries a more attractive free cash flow yield of 5% versus the market’s 4.7%. And with relative earnings revisions for the overall market taking a nosedive, Wilson pointed out that the Vintage Values list has a “far superior” positive revisions profile versus the S&P 500’s negative 3-month smoothed revisions.
The list is more tilted towards larger firms, with 63% of its stocks classified as either large- or mega-cap, said Wilson. He also pointed out that the list’s average market capitalization of $211 billion is significantly above the S&P 500’s average of $74 billion.
60% of the names on the list were growth stocks, with 7% of firms falling into the value bucket, and the remaining 33% belonging to neither investing style. This is well above the S&P 500’s 39% growth stock weighting and well below its 25% value weighting, Wilson noted.
Finally, Wilson highlighted the fact that the Vintage Values list is marginally tilted more defensively than the overall market, with 33% of its stocks classified as cyclical and 27% as defensive, versus the S&P 500’s respective weightings of 41% and 24%.
The updated Vintage Values list of 15 stocks for the next twelve months is below, along with each firm’s ticker, sector, market capitalization, price target, and respective analyst commentary.