MORGAN STANLEY: These Huge Stocks Show That The Market Is Already Expecting Disaster

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Morgan Stanley has identified 11 highly-rated stocks that have been plagued by recent sell-offs and are thus now trading very closely to what MS calls their “Bear Case valuations.”These are prices for each stock below Morgan Stanley’s official price targets that attempt to take into account fair value of the shares under a more drastic downside scenario.

In a note to clients, they write:

Our analysts have identified names that have sold off or simply languished despite unchanged, or, in some cases, improving fundamentals. These 11 stocks are all rated Overweight, and most have an identifiable catalyst that could push shares higher over the next six months. Interestingly, the list includes stocks from 8 different sectors.

The risk-reward profile for these 11 stocks is highly attractive: All of them are trading within 10% of our
Bear Case. The median upside to our price targets for the 11 stocks is 35%, while the median downside to our bear case is 3%; the analysts also confirmed it is unlikely they will revise their Risk-Reward analysis downward in the near term.

#1: Cisco Systems (CSCO)

Industry: Communications Equipment & Data Networking

Current price: $16.33

Estimated fair value in Morgan Stanley's most bearish case: $17.00

Why the market is wrong: Morgan Stanley says much of the sell-off in Cisco has been related to macro concerns, which MS analysts believe has already been priced in at these levels. MS also notes that 'investors currently underappreciate Cisco's franchise position in the data centre,' where they are gaining market share.

Near term catalysts: Morgan Stanley sees the 'natural seasonality of end-of-year enterprise spending and a 2H12 rebound in telco spending' as a potential upside catalyst for CSCO. MS also says that customers have paused normal spending as they waited for the new Intel Romley server CPU, and that 'high-margin Data centre revenue should increase sequentially in the July quarter' as that spending resumes.

Description: Cisco Systems manufactures networking products like routers, wireless access points, and switches that connect computers around the world.

Source: Morgan Stanley

#2: Freeport McMoRan (FCX)

Industry: Nonferrous Metals & Mining

Current price: $32.04

Estimated fair value in Morgan Stanley's most bearish case: $30.00

Why the market is wrong: According to Morgan Stanley, 'FCX is pricing copper at $2.80/lb, a 17% discount to spot.' Rising copper prices bode well for Freeport-McMoRan, and Morgan Stanley is currently bullish on copper. MS also forecasts production growth at FCX around 35 per cent versus 22 per cent in the industry over the period 2011-15, which 'the market does not appreciate.'

Near term catalysts: As noted above, Morgan Stanley sees rising copper prices as an upside catalyst for FCX. They note that copper is trading in Shanghai for less than in London due to 'weak Chinese buying.' Morgan Stanley expects this relationship to reverse in the second half of the year, which 'should spur confidence in Chinese demand.'

Description: Freeport-McMoRan is one of the world's largest producers of both copper and gold.

Source: Morgan Stanley

#3: International Game Technology (IGT)

Industry: Gaming & Lodging

Current price: $14.30

Estimated fair value in Morgan Stanley's most bearish case: $14.00

Why the market is wrong: Morgan Stanley says 'a sequence of events (recent DoubleDown acquisition and messy F2Q results) combined to shake investor confidence,' but that share repurchases on the order of 25 per cent can be made if IGT 'maintains 2.0x of leverage and uses 50% of excess FCF to buy back its stock.'

Near term catalysts: Morgan Stanley expects 'improving domestic casino openings and international share gains' to translate into higher earnings in future quarters.

Description: International Game Technology manufactures games commonly found in casinos like slot machines and video poker.

Source: Morgan Stanley

#4: Kraft Foods (KFT)

Industry: Food

Current price: $38.27

Estimated fair value in Morgan Stanley's most bearish case: $35.00

Why the market is wrong: Morgan Stanley claims 'the market is not fully discounting KFT's compelling balance between strategic value creation and fundamental strength.' MS points to consistency of earnings, strong guidance, and 'the opportunity for enhanced cash returns' as items currently discounted in the share price.

Near term catalysts: Morgan Stanley thinks Kraft will benefit from investor meetings in the second half of the year that will allow the company to provide better long-term guidance on growth and earnings for investors. MS also notes that Kraft will gain market share over time and will benefit from increased selling volume as grocery prices moderate.

Description: Kraft is a global food manufacturer that operates a massive portfolio of food brands including its namesake as well as Oreo, Nabisco, and Oscar Mayer.

Source: Morgan Stanley

#5: Las Vegas Sands (LVS)

Industry: Gaming & Lodging

Current price: $46.18

Estimated fair value in Morgan Stanley's most bearish case: $45.00

Why the market is wrong: Morgan Stanley says that a decrease in revenue growth in Macau, one of LVS's major markets, is ignoring the company's 'unique operating position in the market' that it derives from being mass-focused as opposed to catering to the VIP crowd. MS says that 'Macau is undergoing a permanent shift: the mass market has overtaken VIP as the fastest-growing segment.'

Near term catalysts: Morgan Stanley expects LVS to beat on Macau revenue estimates in June and continue to outperform in that market.

Description: Las Vegas Sands operates luxury hotels and casinos in the U.S. and Macau.

Source: Morgan Stanley

#6: Monsanto Company (MON)

Industry: Agricultural Chemicals

Current price: $77.20

Estimated fair value in Morgan Stanley's most bearish case: $70.00

Why the market is wrong: Morgan Stanley says Monsanto stock is getting beat up due to the USDA's forecast for higher corn supply, which could send corn prices lower. However, MS doesn't think supply will come in as strong as forecasted. Also, MS notes that Monsanto isn't just tied to what happens in the United States, which 'the market appears to be missing.' On this, MS writes, 'Brazil and Argentina biotech corn demand has inflected positively and Monsanto is making progress in Eastern European corn seeds.'

Near term catalysts: Morgan Stanley cites potential near-term catalysts including the actual read on the U.S. corn crop, which will come in through the summer months, as well as the fall planting season in South America.

Description: Monsanto is a global agricultural biotech company that manufactures herbicides that protect farmers' crops from the elements.

Source: Morgan Stanley

#7: Prudential Financial (PRU)

Industry: Insurance - Life/Annuity

Current price: $46.45

Estimated fair value in Morgan Stanley's most bearish case: $45.00

Why the market is wrong: Morgan Stanley says that Prudential's latest miss on earnings led to overdone selling, as the miss was largely driven by non-recurring items. Right now, MS believes the market is 'giving no credit to the stock for future ROE improvement,' which MS thinks could amount to 3 per cent (ROE improvement) over the next 12 to 18 months.

Near term catalysts: Morgan Stanley cites a 'likely improvement' in earnings results in the second quarter and 'improved confidence in the ROE outlook' for Prudential as the year goes on.

Description: Prudential is a financial services company operating large insurance and investment management arms.

Source: Morgan Stanley

#8: Rockwell Collins (COL)

Industry: Aerospace & defence

Current price: $50.37

Estimated fair value in Morgan Stanley's most bearish case: $50.00

Why the market is wrong: Morgan Stanley notes that 'consensus EPS estimates are near the low-end of management's range,' which suggests the market lacks confidence in management to a degree. MS also highlights activist investor Heidi Wood's involvement with the company, saying that she 'thinks the company has the capacity to do more, and with the stock languishing, the activist may become aggressive.'

Near term catalysts: Morgan Stanley says to watch out for Rockwell's next earnings announcement in July, saying, 'with expectations and valuation low, even an in-line number may be sufficient to drive the stock higher.'

Description: Rockwell Collins is a defence contractor that primarily manufactures systems used in planes and other equipment in aerospace and defence.

Source: Morgan Stanley

#9: Thermo Fisher Scientific (TMO)

Industry: Life Science Tools & Diagnostics

Current price: $50.48

Estimated fair value in Morgan Stanley's most bearish case: $47.00

Why the market is wrong: Morgan Stanley says macro factors and concerns over R&D funding are bringing down TMO shares, but that 'diligence suggests that there will not be material funding changes for scientific research budgets in 2013 vs. current levels.' MS also thinks the current price of TMO shares 'does not reflect TMO's ability to grow EPS at least 10% in 2013 with or without Sequestration in the US.'

Near term catalysts: Morgan Stanley identifies less catalysts here than in other stocks mentioned, but says that as time goes on, macro risks will become more clear, and if TMO continues to report growing earnings, confidence in the stock should increase.

Description: Thermo Fisher Scientific manufacturers lab devices and equipment for the medical industry.

Source: Morgan Stanley

#10: United Technologies (UTX)

Industry: Aerospace & defence

Current price: $74.11

Estimated fair value in Morgan Stanley's most bearish case: $75.00

Why the market is wrong: Like many other stocks mentioned here, Morgan Stanley sees macro risks -- specifically 'slowing growth in emerging markets' and the situation in Europe -- as weighing negatively on UTX stock. Furthermore, MS says that UTX earnings are expected to be 'back-half loaded,' meaning they haven't looked great so far this year.

Near term catalysts: UTX has two acquisitions in the pipeline: IAE, which will conclude in June, and Goodrich, which will conclude in July. Morgan Stanley expects these to be more accretive to earnings than the market is currently pricing for UTX. Also, MS believes earnings will improve as they are expected to be 'back-half loaded' this year.

Description: United Technologies provides high tech equipment like elevators and escalators and ventilation systems to primarily the aerospace and building industries.

Source: Morgan Stanley

#11: Williams Partners (WPZ)

Industry: Midstream Energy LPs

Current price: $52.90

Estimated fair value in Morgan Stanley's most bearish case: $52.00

Why the market is wrong: Morgan Stanley believes a recent secondary offering has taken an excessive toll on WPZ shares. MS also notes that there is a 'lack of understanding of how limited WPZ's current NGL price exposure is relative to historical sensitivity' which is holding down shares.

Near term catalysts: Morgan Stanley lists several upside catalysts for WPZ shares, including more money spent on 'high growth shale plays' like Marcellus as well as potential announcements regarding new agreements in the Utica Shale and any sign of increased bullishness in the natural gas market.

Description: Williams Partners constructs infrastructure to support the growing industry extracting natural gas from shale deposits in North America.

Source: Morgan Stanley

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