- The benchmark S&P 500 index is close to all-time highs again, and Morgan Stanley strategist Boris Lerner says stock picking is becoming more important as equities stop swinging in unison.
- Lerner and his team just updated their MOST stocks, a group they say is going to beat the market handily over the next three months.
- The stocks are highly rated based on advanced quantitative measurements and carry "buy" ratings from Morgan Stanley's analysts.
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Despite everything that has happened in the past six months, the stock market is on the verge of setting record highs again.
It has inspired reactions from confusion to pessimism that the rally will continue to intense optimism that the recovery is just getting started.
One much-discussed element of the recovery is that a lot of the market's recent gains are concentrated in a relatively small number of stocks.
"Only 42% of the S&P 500 constituents have beat the index return in July, which ranks this month in the 9th percentile relative to the last 20 years," Morgan Stanley Quantitative Strategist Boris Lerner wrote in a recent note.
That leaves a lot of room for improvement in a lot of stocks. At the same time, one of the unusual features of the 2020 stock market is fading. That's the high correlation of stocks, or the fact that they've tended to rise together or fall together.
"When stock correlation is high, there is less discernible benefits from diversification whereas low levels of stock correlation can present better opportunities for active stock pickers," he said.
With correlations falling, he's identifying some of the stocks that have the best shot at standing out. The firm's MOST model uses quantitative measurements to find the stocks that can offer the best risk-adjusted return over the next three months.
Lerner winnows the field further and introduces a human element by picking the stocks that rank in the top 20% according to the MOST model and are rated "overweight" by Morgan Stanley's analysts.
The following stocks fit that bill and have upside of at least 15% based on Morgan Stanley's 12-month price targets. They're ranked from lowest to highest based on the amount of upside to that figure relative to their Wednesday closing prices.
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9. American Electric Power
Ticker: AEP
Sector: Utilities
Price target: $100
Upside to target: 18.8%
Source: Morgan Stanley
8. General Electric
Ticker: GE
Sector: Industrials
Price target: $18
Upside to target: 19%
Source: Morgan Stanley
7. Raymond James Financial
Ticker: RJF
Sector: Financials
Price target: $91
Upside to target: 19.3%
Source: Morgan Stanley
6. AT&T
Ticker: T
Sector: Telecommunication services
Price target: $36
Upside to target: 19.3%
Source: Morgan Stanley
5. Schlumberger
Ticker: SLB
Sector: Energy
Price target: $25
Upside to target: 22.8%
Source: Morgan Stanley
4. Fox
Ticker: FOXA
Sector: Communication services
Price target: $31
Upside to target: 24.4%
Source: Morgan Stanley
3. Williams Cos.
Ticker: WMB
Sector: Energy
Price target: $25
Upside to target: 30.7%
Source: Morgan Stanley
2. Citizens Financial Group
Ticker: CFG
Sector: Financials
Price target: $36
Upside to target: 35.9%
Source: Morgan Stanley
1. Exelon
Ticker: EXC
Sector: Utilities
Price target: $59
Upside to target: 52.4%
Source: Morgan Stanley