Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley U.S. equity strategist believes that market uncertainty will lead to lower valuations, and stock prices by extension, and favours the most efficient companies to combat volatility,
“The current investment environment is faced with more uncertainties than usual, which explains the higher volatility and rising risk premiums—i.e., falling valuations. During such periods, it’s what we don’t know that can hurt us the most, which means it’s not a time to be overconfident about the future … Our work suggests the market is now paying up for companies that have a better chance of delivering earnings in a more challenging operating environment. Rather than growth or defensiveness, the market wants operational efficiency defined as low capex/sales, inventory/sales growth and employee turnover … The median stock forward P/E for the S&P is still 19x (94th percentile of historical levels back 40 years). We think this lends support to the idea that multiples across the index have room to compress.”
The list of high efficiency stock picks is long so I’ll take out the energy and financials (domestic investors tend to favour domestic companies in these sectors). Here goes: Coca Cola Co., Walt Disney Co., Qualcomm Inc., Philip Morris, Uber Technologies Inc., Becton Dickinson Co., Edwards Lifesciences, Eaton Corp., Northrup Grumman Corp., American Electric, Trane Technologies, Corteva Inc., Public Services Enterprises, Lyondellbasell, Ametek Inc., Stanley Black and Decker, Centerpoint Energy, Alnylam Pharmaceuticals, Western Digital, Nortonlifelock Inc., Bath and Body Works Inc., Howmet Aerospace inc., Elanco Animal Health, APA Corp., Dentsply Sirona Inc., Vistra Corp., NRG Energy Inc., Sensata Technologies, Capri Holdings Ltd., Under Armour Inc., Envista Holdings Corp., Playtika Holdings Corp., Boyd Gaming, PVH Corp., Tenable Holdings Inc., Curtiss-Wright, NCR Corp., Iridium Communications, and Chart Industries Inc.
“MS: “Top Quintile of Operational Efficiency in Sector + MS Overweight Rated”” – (full table) Twitter
Citi commodity strategist Edward Morse predicts weakness ahead for the crude price,
“With the escalation of tensions now becoming outright Russian military action into Ukraine, oil prices rallied temporarily above $100. Price spike risk and volatility remain high as global oil inventories are extremely low due to concerted OPEC+ action and plummeting U.S. production while winter oil demand has been stronger, in part due to gas-to-oil switching. 1Q’22 now looks to see a stock draw of 0.9-m b/d, rather than a stock build. However, with our base case now seeing Iranian sanctions relief in 2Q, along with fast growth in OPEC+ and non-OPEC+ supply, global oil inventories shift to stock builds of well over 1-m b/d in 2Q’22 and beyond. We revise up our 2022 Brent prices, but maintain a significant downward trajectory through 2022, continuing to see major downside for Dec’22 oil prices as the focus shifts away from geopolitical risk to sustained oversupply and peaking oil demand … We revise our oil price outlook upwards in 2022, with 1Q’22 up $12 to $91, but maintain a downward trajectory for prices through the year to reach the $60s by year end.”
“Citi: “Ukraine oil price volatility unlikely to counter supply surge ahead”” – (research excerpt) Twitter
A security breach at NVIDIA Corp. makes the analysis of Morgan Stanley’s Hamza Fodderwala more pertinent. Mr. Fodderwala forecasts heightened security software spending and provides his top related stock picks, according to a research summary sent by the company (I don’t have the full report yet),
“MS Research Analyst Hamza Fodderwala highlights that the security demand environment is stronger than it has been in several years and shows no signs of slowing down. He thinks strong security demand should remain durable through ‘22 and, as a result, security stocks provide better opportunities for relative outperformance vs broader software for 3 key reasons: 1) Rising Threats: the threat environment continues to intensify and is unlikely to slow down after significant rise in ransomware and state-sponsored attacks over the last year. He points out that recent tensions in Ukraine/Russia likely add to overall security priority and drive upward pressure to Federal spend in ‘22; 2) Defensible Budgets: Security is by far least likely to be cut in slower macro scenario; and 3) More Favorable Valuations: Hamza points out that the median security stock is trading right around the historical 5-year average EV/NTM sales [enterprise value to next twelve months sales] multiple, despite stronger demand and potential upward revisions. He thinks M&A could also be a bigger theme in ‘22 with many SMID cap names appearing oversold and trading below historical M&A multiples. Hamza notes that Security companies with largest US govt exposure include: MNDT (EW, $16 PT), TENB (OW, $63 PT), SAIL (OW, $65 PT), PANW (OW, $670 PT), and CRWD (UW, $197 PT). He thinks ZS (OW, $325 PT) is likely to grow fastest within Federal in ‘22 after receiving multiple FedRAMP certifications last year”
“Top network security stock picks from MS " – (research excerpt) Twitter
Newsletter: “Worst drought in 1200 years makes this stock attractive” – Globe Investor
Diversion: The Twitching Generation - The Atlantic
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