8 Stocks To Lead The Market: Morgan Stanley – Investopedia

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While Morgan Stanley has been issuing extremely bearish forecasts about the stock market as a whole, the firm nonetheless is very upbeat about the prospects for 8 large-cap stocks, including Southwest Airlines Co. (LUV), Alcoa Corp. (AA), American Axle & Manufacturing Holdings Inc. (AXL), Caterpillar Inc. (CAT), Ford Motor Co. (F), Honeywell International Inc. (HON), Knight-Swift Transportation Holdings Inc. (KNX) and United Technologies Corp. (UTX), according to Business Insider.

Specifically, Morgan Stanley believes that a number of industrial stocks are depressed, underappreciated, or both, despite offering attractive valuations and future profit potential. As a result, these stocks should be well positioned to weather the “rolling bear market” that the firm expects to sweep across one market sector after another. By contrast, Morgan Stanley warns that high-flying technology stocks are in an especially precarious position, at risk of sharp price declines. (For more, see also: ‘Rolling Bear Market’ Will Paralyze Stocks for Years: Morgan Stanley.)

8 Stocks That May Dominate

Stock Trailing P/E Ratio Forward P/E Ratio
Alcoa 55.7 10.9
American Axle 4.9 5.2
Caterpillar 28.2 11.4
Ford 5.6 6.8
Honeywell 77.2 18.6
Knight-Swift 9.5 13.4
Southwest Airlines 10.2 12.3
United Technologies 21.4 17.4

Source: Yahoo Finance

While industrial stocks surged ahead of the broader market after the 2016 election, they have since fallen back, with a cumulative total return since then that lags the market. However, Morgan Stanley finds that earnings growth is accelerating for the sector, and that investments in capital expenditures are setting these stocks up for continued growth, even as the economic cycle enters its late stages. By way of illustration, below is more detail on why Morgan Stanley likes four of these stocks, per Business Insider.

American Axle

The company is on a drive to reduce its leverage ratio from 3x to 2x by the end of 2019, potentially followed by share repurchases from 2020 onwards. The price target on the stock is roughly 20% above the Sept. 14 opening price.


Honeywell is spinning off slower-growing businesses, sticking instead to businesses where it offers “tech differentiation,” leading to the likelihood of growth at twice the rate of GDP growth, and thus an increased valuation multiple. The price target is nearly 6% above the Sept. 14 open.

Southwest Airlines

The discount airline is cited for above-average profit margins and a “shareholder friendly approach.” The price target is roughly 8% above the Sept. 14 open. Analysts at other firms have cited earnings stability at Southwest as a rationale for a significantly higher valuation multiple. (For more, see also: 3 Airline Stocks Ready to Take Off.)

United Technologies

The potential for restructuring of this industrial conglomerate, plus increased value produced by strong orders for the Pratt & Whitney Geared Turbofan (GTF) jet engine, lead to optimism about the stock. The target price is almost 18% above the Sept. 14 open.