"The leading macro data suggests that we're in a late cycle market environment as do the internals of the equity market," analyst Andrew Pauker wrote in a Tuesday note.
To play any potential slowdown year-end, the firm advises turning to traditional defensive stocks, some select growth opportunities, and late cyclical names.
"In line with the historical precedent, the combination of these cohorts has outperformed the broader market during the current late cycle regime, which began last year," Pauker said
Walmart is one of the utility players investment bankers at Morgan Stanley tout as a defensive play, as they expect it to show accelerating EBIT growth. Another Morgan Stanley top stock pick for shrugging off any slowdown is Thermo Fisher Scientific, which boasts attractive long-term fundamentals. The analysts also expect demand for staples such as groceries and households to remain strong, which should benefit Yum! Brands, Inc. (NYSE:YUM) and McDonald’s Corporation (NYSE:MCD).
Our Methodology
Morgan Stanley analysts have already warned about the need to be cautious heading into year-end. Amid the warnings, there are stocks that the analysts expect to outperform, going by their market-leading positions and solid underlying fundamentals. We have compiled a list of Morgan Stanley's top stock picks for offsetting any downside. The stocks are ranked chronologically based on their upside potential.
Share Price Upside: 15%
Number of Hedge Fund Holders: 33
Headquartered in Vernon Hills, Illinois, CDW Corporation (NASDAQ:CDW) offers information technology solutions in the US. Its product line includes discrete hardware and software products, services and integrated IT solutions, including on-premise, hybrid, and cloud capabilities.
Much of CDW Corporation (NASDAQ:CDW)'s growth in 2023 has come on robust demand for its software-as-a-service solution that's offsetting declines in hardware. While CDW Corporation stock is up by 11% year-to-date, it has outperformed the S&P 500, that is up by about 8%. Morgan Stanley maintains a $230 price target, implying a further 15% upside potential.
CDW Corporation (NASDAQ:CDW) had 33 hedge funds among its shareholders, according to a survey of 910 hedge funds by Insider Monkey in Q2 2023. The firm's biggest investor was Select Equity Group, led by Robert Joseph Caruso, with a stake of $1.01 billion.
Here is what Wedgewood Partners said about CDW Corporation (NASDAQ:CDW) in its Q3 2023 investor letter:
“CDW Corporation (NASDAQ:CDW) also contributed to the performance during the quarter as the Company’s gross profit dollars grew slightly on a very difficult comparison (+35%) from a year ago. Much of this growth was driven by robust demand for software-as-a-services solution that more than offset double-digit declines in hardware from post-pandemic digestion. Software vendors partner with CDW because the Company has relationships with over 250,000 small and medium- sized customers (SMBs). It is often cost-prohibitive for software vendors to sell directly to this “long tail” of SMB customers, so CDW provides value for both IT consumers and vendors. The Company is well-positioned to intermediate technology vendors’ cutting-edge solutions and SMB’s growing IT-budgets, regardless of what new technology comes to dominate those budgets.”
Share Price Upside: 20%
Number of Hedge Fund Holders: 62
MongoDB, Inc. (NASDAQ:MDB) is a technology company that provides a general-purpose database platform. It offers a multi-cloud database as a service solution for enterprise customers to run in the cloud, on-premise and in a hybrid environment.
Morgan Stanley analysts believe MongoDB, Inc. (NASDAQ:MDB) will be a software winner amid the AI revolution as it is up by about 101%, beating the 8% S&P 500 gain. The analysts maintain a buy rating on MongoDB, Inc. (NASDAQ:MDB) with a $405 price target, implying a 20% upside potential.
MongoDB, Inc. (NASDAQ:MDB) was a popular choice among 62 hedge funds in Q2 2023 out of 910 hedge funds surveyed by Insider Monkey. The most significant stake in the firm belonged to Tairen Capital, a hedge fund run by Larry Chen and Terry Zhang, which held 500,453 shares worth $205 million.
ClearBridge Investments expressed its opinion on MongoDB Inc. (NASDAQ:MDB) in its investor letter for Q3 2022:
“We made limited changes to the portfolio in the third quarter. New buys included embryonic positions in several rapid growers — MongoDB, Inc. (NASDAQ:MDB) and Clear Secure (YOU) — whose valuations have come in quite dramatically. MongoDB is a company we followed for many years before its 2017 IPO. The stock looks very attractive trading at a third of its recent peak in November 2021. The company’s database software is growing rapidly and taking share in a $50 billion plus global market.”
Share Price Upside: 21%
Number of Hedge Fund Holders: 152
Alphabet Inc. (NASDAQ:GOOG) is an internet giant that offers an array of services and products. It is best known for Google search and YouTube, from which it generates billions of dollars through advertising. In addition, Alphabet Inc. (NASDAQ:GOOG) operates a cloud computing unit and sells applications through the Google Play Store.
Morgan Stanley forecasts that for every 2% in artificial intelligence spending, it will drive a 5% upside in the Alphabet cloud platform, translating to $3 billion in incremental revenue by 2026. Alphabet Inc. (NASDAQ:GOOG) has outperformed the S&P 500 8% gain, going by its 38% gain year to date. The investment bank maintains a Buy rating on the stock with an average $152.78 price target, implying a 21% upside potential.
Out of 910 hedge funds monitored by Insider Monkey, 152 were invested in Alphabet Inc. (NASDAQ:GOOG) as of June 30. The firm's prominent investor in Q2 2023, was Bailard Inc., which held 544,126 shares worth $71.20 million.
Share Price Upside: 23%
Number of Hedge Fund Holders: 171
Visa Inc. (NYSE:V) is a financial services company that operates as a payment technology company. The company offers credit, debit and prepaid card products that allow people to make payments. The company has been making waves, having partnered with Sweden-based Froda to provide small business loan payout.
Visa Inc. (NYSE:V) has benefited from a robust economy that has triggered strong consumer spending power. Consequently, the stock is up by 13% for the year against 8% gain for the S&P 500. Morgan Stanley maintains a buy rating on the stock with a $292 price target, implying a 23% upside potential.
Visa Inc. (NYSE:V) had 171 hedge funds as shareholders in Q2 2023 out of 910 hedge funds surveyed by Insider Monkey. The hedge fund with a significant stake in the firm was Bailard Inc., which owned 163,316 shares worth $37.56 million.
In its Q2 2023 letter to investors, Baron FinTech Fund shared its thoughts on Visa Inc. (NYSE:V):
“We modestly trimmed Visa Inc. (NYSE:V), Mastercard Incorporated, and Accenture plc to manage the position sizes and raise capital to fund purchases elsewhere. These stocks remain full-sized positions and high-conviction ideas in the Fund.
Share Price Upside: 23%
Number of Hedge Fund Holders: 175
Morgan Stanley analysts are overly bullish about Santa Clara, California-based NVIDIA Corporation (NASDAQ:NVDA), insisting it is well poised to benefit from the artificial intelligence boom. The technology company is best known for its graphic segment, which offers graphics processing units in high demand for powering AI innovations.
In addition, Nvidia GPUs are increasingly being used in gaming and PCs and data centers, which continue to affirm the company's long-term prospects.
NVIDIA Corporation (NASDAQ:NVDA) has rallied by more than 200% compared to 8% S&P 500 gain, affirming why it is one of Morgan Stanley's top stock picks for 2023. The stock is rated as a Buy with an average price target of $509.98, implying a 23% upside potential.
The number of hedge funds that invested in NVIDIA Corporation (NASDAQ:NVDA) increased from 132 to 175 in Q2 2023 out of 910 hedge funds monitored by Insider Monkey.
Here is what Artisan Developing World Fund said about NVIDIA Corporation (NASDAQ:NVDA) in its Q3 2023 investor letter:
“Our focus on scalable business models has its roots in our economic framework. As potential output moderated in most emerging countries, it became clear to us affordability was not improving and that low penetration was necessary but not sufficient for value creation. We eliminated companies from the portfolio that were struggling to generate revenue significantly in excess of fixed costs, often replacing them with passport companies such as NVIDIA Corporation (NASDAQ:NVDA) and Airbnb that were economically tied to emerging markets. Over a period of time, we have been successful in redefining the emerging markets opportunity set around real per capita GDP increases, growth in the middle class, revenue velocity and demand fulfilment. Combined with changes in the market backdrop that have resulted in privileged competitive positions for companies with financial strength and access to capital, we find our opportunity set expanding anew to include companies that are both based in emerging markets and conducive to value creation.”
Share Price Upside: 23%
Number of Hedge Fund Holders: 44
Monster Beverage Corporation (NASDAQ:MNST) is a consumer defensive play that engages in the development, marketing, sale and distribution of energy drink beverages. It offers carbonated and non-carbonated energy drinks, ready-to-drink iced teas and juice drinks.
While the stock is flat for the year, it is expected to steady even on the overall market, coming under pressure as a defensive play. Monster Beverage Corporation (NASDAQ:MNST) is one of the defensive plays that Morgan Stanley’s stock pick analysts expect to outperform. The average price target on the stock is $60.06, implying 20% upside potential.
Monster Beverage Corporation had 44 hedge funds as shareholders, according to Insider Monkey's data. The firm's prominent investor was Bailard Inc., a hedge fund led by Thomas Bailard, which held a $1.06 million stake in the company.
Share Price Upside: 23%
Number of Hedge Fund Holders: 300
Headquartered in Redmond, Washington, Microsoft Corporation (NASDAQ:MSFT) is a company that develops software, services, devices and solutions. It is best known for its software suite, which includes Microsoft Teams, office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 copilot. It also offers cloud computing solutions through Azure and operates gaming units under the Xbox console umbrella.
Morgan Stanley analysts expect Microsoft Corporation (NASDAQ:MSFT) to be one of the beneficiaries of the AI boom, having already integrated AI-powered ChatGPT into its search engine. The stock is already up by more than 41% for the year, emerging as one of Morgan Stanley's top stock picks on performance. The bank expects the stock to top a $3 trillion valuation in 2024. The bank has a $415 price target, implying a 23% upside potential.
Out of 910 hedge funds tracked by Insider Monkey, Microsoft Corporation (NASDAQ:MSFT) was the most favored stock in Q2 2023, with 300 hedge funds holding stakes in the firm. The total value of these stakes was almost $70 billion.
This is what ClearBridge Value Equity Strategy said about Microsoft Corporation (NASDAQ:MSFT) in its Q2 2023 investor letter:
“We initiated a small position in Microsoft Corporation (NASDAQ:MSFT) during the quarter, which may seem surprising given our concerns about index concentration. However, we seized the opportunity on a compelling entry point below our business value estimate, due to an anticipated acceleration of demand for Microsoft’s Azure cloud business and incremental revenues from integration of Microsoft’s AI Copilot program into its office platform. We believe this could support double-digit growth, while simultaneously solidifying Microsoft’s competitive position as an AI winner. Even as a small position, we believe Microsoft provides a large portfolio construction benefit given low correlation to the rest of the portfolio.”
Share Price Upside: 23%
Number of Hedge Fund Holders: 32
Simon Property Group Inc. (NYSE:SPG) is a real estate investment trust that owns and operates premier shopping, dining, entertainment and mixed destinations. It boasts premium properties in North America, Europe and Asia through which it generates rental income and distributes to shareholders.
Simon Property Group Inc. (NYSE:SPG) remains one of Morgan Stanley's top stock picks for 2023 as it enjoys occupancy rates above 95% in its properties. Net operating income is rising as the company continues to bounce back from the COVID-19 slowdown. The consensus rating on the stock is a buy with a $130.38 price target, implying a 23% upside potential.
Simon Property Group, Inc. (NYSE:SPG) had the support of 32 hedge funds in Q2 2023, down from 35 in the previous quarter, according to Insider Monkey's data. AEW Capital Management, led by Jeffrey Furber, was a major shareholder of the firm, holding 518,145 shares worth $59.83 million.
Share Price Upside: 25%
Number of Hedge Fund Holders: 109
Adobe Inc. (NASDAQ:ADBE) is a technology company that operates as a diversified software company offering products, services and solutions that enable individual teams and enterprises to create, publish and promote content. Adobe Inc. (NASDAQ:ADBE) flagship product is Creative Cloud, a subscription service that allows members to access its creative products.
Adobe Inc. (NASDAQ:ADBE) is one of Morgan Stanley's analysts' top AI picks, going by 57% year-to-date gain as it continues integrating generative AI functionality into its workflow solutions to enable stickier customer engagements. Morgan Stanley maintains a $660 price target on the stock, implying a 25% upside potential.
Adobe Inc. (NASDAQ:ADBE) had 109 hedge funds as shareholders out of 910 hedge funds tracked by Insider Monkey. The hedge fund with a remarkable stake in the firm was Bailard Inc., which owned about 48,140 shares valued at $24.55 million.
Here is what Aristotle Large Cap Growth Strategy said about Adobe Inc. (NASDAQ:ADBE) in its Q3 2023 investor letter:
“Adobe Inc. (NASDAQ:ADBE) is one of the largest and most diversified software companies in the world. It has been known for brands such as Acrobat, Photoshop and Adobe Document Cloud. Adobe’s business is organized into three reportable segments: Digital Media, Digital Experience, and Publishing and Advertising. The Company’s products allow users to express and use information across all print and electronic media.
Share Price Upside: 25%
Number of Hedge Fund Holders: 49
Howmet Aerospace Inc. (NYSE:HWM) is an industrial company with defensive credentials. The company provides advanced engineering solutions for the aerospace and transportation industries. Howmet Aerospace Inc. (NYSE:HWM) also includes titanium ingots and mill products, alluminium and nickel forgings, and machined components and assemblies for aerospace and defense applications.
It remains one of Morgan Stanley's top stock picks as plane makers ramp up production as international travel heats up after COVID-19. The stock is up by about 10%, beating the 8% S&P 500 gain. The average price target on Howmet Aerospace Inc. (NYSE:HWM) is $54.31, implying a 25% upside potential.
In the June quarter of 2023, 49 hedge funds out of the 910 that Insider Monkey followed had invested in Howmet Aerospace Inc. (NYSE:HWM), up from 42 in the preceding quarter.
In the Q1 2023 investor letter from the Oakmark Equity and Income Fund, they provided the following observation concerning Howmet Aerospace Inc. (NYSE:HWM):
“During the quarter, we eliminated three positions: Howmet Aerospace Inc. (NYSE:HWM), Keurig Dr Pepper and LivaNova. Howmet performed well and reached our sell target. This is our second successful investment with CEO John Plant, whom we rank among the top CEOs.”
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Disclosure: None. Morgan Stanley's 15 Stock Picks for 2023 is originally published on Insider Monkey.
