MORGAN STANLEY: Buy these 12 underappreciated stocks that offer strong profit growth and are due for a surge

• Michael Wilson, Morgan Stanley's chief US equity strategist, is naming a group of companies with strong earnings and far lower prices than their profits suggest they deserve.
• Wilson found the group by tracking five years of price and profit data for 1,500 companies.
• These stocks have historically displayed a tight relationship between their earnings and price movements, and he says that's evidence a "catch up trade" could develop.
• Click here to sign up for our weekly newsletter Investing Insider.
• Visit Business Insider's homepage for more stories.

Find the stocks that should be up, then bet that they're going to go up. It sounds like the simplest idea.

But there can be a giant gap between an idea and the execution of it. When Michael Wilson, the chief US equity strategist and chief investment officer for Morgan Stanley, implemented this basic, almost value-investing-style approach, he wanted to find the stocks with the most promise.

So Wilson and his team evaluated the largest 50% of Russell 3000 companies by market capitalization and looked over five years of market and earnings data to find companies that showed the strongest links between price-to-earnings ratios and outperformance relative to the S&P 500.

Once they had established that relationship, they looked for companies where the connection was unexpectedly severed in 2020, as their prices are now significantly lower than their relative earnings say they should be.

"We screened for stocks that (1) have historically had a strong link between relative performance and the outlook for forward EPS vs the market and (2) where recent performance has materially deviated from that historic relationship on the downside," Wilson wrote.

He said those stocks have lagged the market this year, even though many of them are in defensive sectors, and they've posted better earnings revisions than the broader stock market has.

Wilson said that left a group "that may be due for a catch up trade."

What follows are 12 of those stocks that carry "overweight" ratings from Morgan Stanley's analysts. They're ranked from lowest to highest based on how much their prices have deviated from their expected levels.

Read more:

• JPMorgan says buy these 19 'diamond in the rough' stocks that have plunged from yearly highs, but are spring-loaded for huge gains ahead
• A stock chief for $7.3 trillion BlackRock told us how he's investing to get the best returns — and his top picks for maximum income as Wall Street faces the threat of mass dividend cuts
• 3 ultra-growth fund managers who are crushing the market during a chaotic year told us how they're doing it — including their biggest themes and top picks for the future

SEE ALSO: Michael Venuto's firm provides unique ETFs that have returned as much as 60% for investors this year. He breaks down his process — and shares the 'anomaly' investors need to watch today.

12. Bank of America

Ticker: BAC

Sector: Financials

Market cap: $219.3 billion

Relative price deviation: -11.4%

Source: Morgan Stanley

11. Progressive

Ticker: PGR

Sector: Financials

Market cap: $52.5 billion

Relative price deviation: -15.9%

Source: Morgan Stanley

10. Coca-Cola

Ticker: KO

Sector: Consumer staples

Market cap: $201.9 billion

Relative price deviation: -18.4%

Source: Morgan Stanley

9. Amcor

Ticker: AMCR

Sector: Materials

Market cap: $17.6 billion

Relative price deviation: -18.7%

Source: Morgan Stanley

8. Athene Holding

Ticker: ATH

Sector: Financials

Market cap: $7 billion

Relative price deviation: -19.6%

Source: Morgan Stanley

7. TransUnion

Ticker: TRU

Sector: Industrials

Market cap: $16 billion

Relative price deviation: -19.7%

Source: Morgan Stanley

6. Booz Allen Hamilton

Ticker: BAH

Sector: Information technology

Market cap: $11.8 billion

Relative price deviation: -26.3%

Source: Morgan Stanley

5. American International Group

Ticker: AIG

Sector: Financials

Market cap: $25.5 billion

Relative price deviation: -33.7%

Source: Morgan Stanley

4. NRG Energy

Ticker: NRG

Sector: Utilities

Market cap: $8.6 billion

Relative price deviation: -34.8%

Source: Morgan Stanley

3. Vistra

Ticker: VST

Sector: Utilities

Market cap: $9.6 billion

Relative price deviation: -35.1%

Source: Morgan Stanley

2. Graphic Packaging

Ticker: GPK

Sector: Materials

Market cap: $4 billion

Relative price deviation: -45.3%

Source: Morgan Stanley

1. Paramount Group

Ticker: PRGE

Sector: Real estate

Market cap: $1.5 billion

Relative price deviation: -68.0%

Source: Morgan Stanley