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MORGAN STANLEY: Buy these 20 dirt-cheap stocks with rock-solid global business models — including one that could rally over 100%

  • European equities have outperformed MSCI’s All Country World Index since February.
  • But the region is still not receiving love from global investors, Morgan Stanley analysts say.
  • We list the bank’s top 20 stock picks with solid business models that are cheap versus global peers.
  • See more stories on Insider’s business page.

European stocks have been unloved for some time, as investors piled into growth stocks that promised huge returns, particularly since early last year with the US market offering access to COVID-19 stay-at-home winners such as

Zoom
and Peloton.

Many market analysts expected that outlook to change as the recovery from the pandemic got underway. Investors looked to leverage as much of that momentum as they could by moving away from pricey so-called growth stocks, such as big technology companies, toward what are known as value stocks, which are more closely linked to the underlying economy, such as the infrastructure and banking sectors.

The European region is more heavily exposed to those sectors that benefit from economic recovery, such as industrials, retail, and transport, while the US market has more exposure to tech stocks, many of which were considered COVID-19 stay-at-home winners.

Yet even with the recovery fully gaining traction in developed markets, Europe’s relative flows remain at the low end of historical ranges compared with the record inflows that global equities have seen in the past three months, according to Morgan Stanley analysts.

In a report released Wednesday, Morgan Stanley analysts said global investors should consider the European region.

The Morgan Stanley analyst Matthew Garman said Europe had outperformed MSCI’s All Country World Index since February “yet there is little evidence of love for the region in a global context.”

Relative valuations are close to 10-year lows, and even when adjusted by sector Europe still looks cheap relative to MSCI’s All Country World Index, a leading global index, Garman said.

European equities have matched the performance of US blue-chip stocks so far this year. The STOXX 600 — an index of major European shares — is up about 11% in 2021, the same as the S&P 500.

Morgan Stanley said rising government-bond yields were driving a better period for European equities. Over the past 12 months, however, European shares have lagged their US peers. The STOXX 600 has gained about 30%, while the S&P 500 has risen by over 40% to record highs this month.

This could soon come to a halt, however.

Morgan Stanley’s US economists are predicting the

Federal Reserve
might start discussing slowing the pace of its asset purchases, or quantitative easing, when it meets in June, a tool it used to support the economy.

Many analysts believe quantitative easing has inflated asset prices and that tapering, in turn, could create a slowdown in the stock market.

“Assuming longer-term growth outlook remains favorable, such a period should represent a temporary pause/reset in a

bull market
rather than anything more extreme — over the long run, equity markets generally track underlying EPS trends,” Garman said.

Despite the potential pause to the bull-market rally in the US, the analysts expect Europe’s economic momentum to further boost European equity performance over the summer.

The analysts also emphasize that investors should worry less about the region’s sectoral mix compared with previous years.

“In each of the last 10 years, Europe’s sector composition has acted as a drag, with the lack of tech the biggest contributor to this,” Garman said.

The mix is now changing. Technology is now the biggest sector within the STOXX 50, an index of the 50 largest eurozone stocks.

“This ongoing change implies higher and less volatile trend EPS growth going forward, and should also make it easier for global investors looking for exposure to structural growth to engage with European equities,” Garman said.

A graph of technology's share of European IPOs from Morgan Stanley's May 5 research note

A graph of technology’s share of European initial public offerings from Morgan Stanley’s Wednesday research note.

Morgan Stanley


Stock picks

Taking this outlook into consideration, the analysts highlight 20 stocks that are rated “buy” and look cheap compared with competitors elsewhere despite boasting leading global business models and comparable growth to their rivals.

The analysts said they felt it was important to highlight companies with strong global franchises, as their clients tell them they are seeking out European equity investments that are broader, with a global focus and that still look affordable.

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