Morgan Stanley research teams, in a research note, outline the activity-based stocks that are still discounted for a post-COVID recovery across five different sectors.
Morgan Stanley recommends investors think about individual stocks instead of sectors.
“The bifurcation between winners and losers within sectors is arguably best exemplified within Retail – in aggregate, the sector has been a strong outperformer this year, but this largely reflects single-stock stories,” Morgan Stanley’s equity analyst, Jamie Rollo, said in a note.
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Morgan Stanley brought together five separate equity research teams to understand which European activity-based stocks damaged by the pandemic were still discounted for a post-COVID recovery, in a new research note released this week.
The investment bank is thinking ahead to recovery based on its biotech team expecting phase three vaccine results by November and a “broadly available vaccine” toward the end of the first quarter in 2021.
“Once a vaccine is widely available, we expect mobility to pick up significantly and activity-based stocks to benefit,” said Morgan Stanley’s equity analyst, Jamie Rollo, in the report.
The new research report finds that broadly most activity-based sectors seem cheap when comparing the 2022 EBITDA forecast to historic results.
Despite most sectors appearing cheap, Morgan Stanley recommends investors think about individual stocks instead of sectors.
“The bifurcation between winners and losers within sectors is arguably best exemplified within retail – in aggregate, the sector has been a strong outperformer this year, but this largely reflects single-stock stories,” Rollo said.
Sector stock picks
Here are some of the stocks Morgan Stanley recommends considering and avoiding within each sector for a post COVID-19 recovery.
Leisure & Hotel Stocks
1) Sodexo
Sodexo stock on October 2
Business Insider Markets
Ticker: SW
Recommendation: Overweight
Category: Food Services
Analyst Commentary: “While home working/learning and food delivery weigh heavily on investor sentiment, we think this mostly affects office catering, which is only 10-20% of the companies’ business. Around half of Sodexo’s profits are derived from relatively resilient support services and vouchers.”
Source: Morgan Stanley Research
2) Basic-Fit
BasicFit stock on October 2
Business Insider Markets
Ticker: BFIT
Recommendation: Overweight
Category: Fitness
Analyst Commentary: “Basic Fit (Overweight) trades at 7.3x 2022 EBITDA, roughly 1x higher than SATS (Equal-weight) , but well below its historical average of 11.4x. We think a valuation premium is warranted given Basic-Fit’s rapid roll-out plan, well located club network, low-cost proposition, modern estate and solid liquidity.”
Source: Morgan Stanley Research
3) Whitbread PLC
Whitbread stock on October 2
Business Insider Markets
Ticker: WTB
Recommendation: Overweight
Category: Hotels
Analyst Commentary: “We prefer Whitbread within our Hotels coverage (domestic, budget, well invested hotels, asset backing).”
Source: Morgan Stanley Research
4) Carnival PLC
Carnival stock on October 2
Business Insider Markets
Ticker: CCL
Recommendation: Underweight
Category: Cruises
Analyst Commentary: “We think that the general concept of cruising (thousands of passengers in a confined indoor space for a long duration) means this will be the last travel industry to return to normal; and that when it does, demand will take some time to recover (one-third of passengers are new to cruises every year, cruise passengers tend to skew older, and negative headlines around the cruise industry during the COVID-19 pandemic will impact demand.”
Source: Morgan Stanley Research
5) William Hill PLC
William Hill stock on October 2
Business Insider Markets
Ticker: WMH
Recommendation: Equal-weight
Category: Gambling
Analyst Commentary: “The gambling stocks trade at an average 11.5x 2022 EV/EBITDA, on our estimates, a little below their 5-year historical average of 11.8x and over a turn above the 10.3x seen at the beginning of 2020. Gambling has been the strongest sub-sector in our Travel & Leisure coverage, with share prices up 40% YTD.”
Source: Morgan Stanley Research
Airline Stocks
1) Ryanair
Ryanair stocks on October 2
Business Insider Markets
Ticker: RYA
Recommendation: Overweight
Category: Airlines
Analyst Commentary: “We prefer Ryanair and Wizz (both Overweight) at current levels, trading at a c25% discount to their EV/EBITDA average; with good growth prospects, we find the risk/reward for both names more attractive.”
Source: Morgan Stanley Research
2) Wizz Air
Wizz Air stock on October 2
Business Insider Markets
Ticker: WIZZ
Recommendation: Overweight
Category: Airlines
Analyst Commentary: See comment above
Source: Morgan Stanley Research
A recent article from Business Insider breaks down Morgan Stanley’s thoughts on Ryanair and Wizz Air in depth as well outlining the European airline stocks to avoid for a travel recovery.
Business Services Stocks
1) Applus Services SA
Applus stock on October 2
Business Insider Markets
Ticker: APPS
Recommendation: Overweight
Category: Inspection & Testing
Analyst Commentary: “By comparison, Bureau Veritas trades below its peak multiple and Applus (Overweight) is trading 5% below its 5-year average. These differences are seemingly less a function of COVID-recovery speed and more an indication of scarcity value, balance sheet strength and dividend yield – hence, the need to be selective within each sub-sector is of paramount importance.”
Source: Morgan Stanley Research
2) Eurofins Scientific Group
Eurofins stock on October 2
Business Insider Markets
Ticker: ERF
Recommendation: Equal-weight
Category: Inspection & Testing
Analyst Commentary: “In particular, we believe Eurofins (Equal-weight), which is generating abnormal profit from providing COVID-19 testing lab capacity, is priced for COVID-19 revenues to recur in perpetuity to some degree. As expectations are recalibrated for a widely available vaccine in 1Q21, we would expect the strongest performers of FY20, which continue to be priced for abnormally high growth, to retrench.”
Source: Morgan Stanley Research
Media Stocks
1) Stroeer SE & CO. KGAA
Stroeer SE & Co Stock on October 2
Business Insider Markets
Ticker: SAX
Recommendation: Overweight
Category: Advertising
Analyst Commentary: “Of [the advertising] group, we see Outdoor, riding on the coattails of digital share gains, as the major beneficiary of share shift. The performance of the two stocks has been intriguing, with Stroeer (Overweight) substantially outperforming JCDecaux (Equal-weight) YTD. Stroeer’s advantages are that its operations are basically in one country, Germany, whose economy is forecast to see one of the lowest dips in activity and fastest recoveries.”
Source: Morgan Stanley Research
2) Pearson PLC
Pearson stock on October 2
Business Insider Markets
Ticker: PSON
Recommendation: Equal-weight
Category: Education
Analyst Commentary: “For Pearson (Equal-weight), COVID-19 has impacted physical sales in its North American courseware business, where existing structural pressures are exacerbated by a potential fall in the number of students. The disruption has also impacted the operation of Pearson’s testing centres globally. On the positive side, the disruption has led to accelerated interest in the take-up of digital education techniques, which should benefit Pearson’s higher multiple online programme management and virtual schools businesses.”
Source: Morgan Stanley Research
Retail Stocks
1) Marks and Spencers Plc
Marks and Spencers stock on October 2
Business Insider Markets
Ticker: MKS
Recommendation: Overweight
Category: Retail
Analyst Commentary: “M&S (Overweight) also screens cheaply, trading at more than a 50% discount versus history.”
Source: Morgan Stanley Research
2) H&M
H&M stock on October 2
Business Insider Markets
Ticker: HM-B
Recommendation: Underweight
Category: Retail
Analyst Commentary: “We also believe H&M and Inditex (also Underweight) should trade at a further discount given that both were going ex-growth in our view, even prior to the pandemic and that, once COVID-19 is over, they will be over-space.”
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