Morgan Stanley's equity analysts expect 2019 to be a year of consolidation for the stock market.
They compiled a list of 25 stocks that should be able to grow their earnings independently of broader market weakness or an economic slowdown.
The stock market has reached a critical juncture that changes the game for investors, according to analysts at Morgan Stanley.
They expect the growth companies that have led gains for most of this bull market run to give way to value stocks. Also, they expect valuation metrics like price-to-earnings ratios to matter more than earnings growth in stock selection.
But don't take this viewpoint as the death knell for companies with outsized growth. Morgan Stanley expects select stocks to continue growing their earnings — and, subsequently, their stock prices — even as the market consolidates. Additionally, these companies offer competitive advantages like market share gains and pricing power that should help them continue growing even if there is a slowdown in the global economy.
In a client note, they listed 25 of these North American companies that have been classified as growth companies for 48 straight months, and have generated positive revenue growth in each of the last 12 quarters.
What's more, only stocks they rated overweight or equal-weight made the cut.
That's where Morgan Stanley's work ends, however. The analysts cautioned that investors still need to study the specific risks and opportunities attached to each company so they know the range of outcomes to expect. But they have high conviction that these 25 names will stand tall in the face of market adversity.
Comment: "Adobe is participating in a ~$108B total addressable market (TAM) with strong secular tailwinds around digital content creation, digital marketing,and eCommerce," Keith Weiss said.
"As Adobe integrates recent acquisitions of Marketo and Magento into an already rich product portfolio, we see the possibility for the company to widen its competitive moat. Together, we see these secular forces supporting both revenue and above-market EPS growth."
Comment: "As the dominant player in US eCommerce, Amazon continues to experience secular growth as retail dollars shift online," Nowak said.
"As Amazon scales its logistics network and expands its Prime membership program globally, we see a significant opportunity to capture a larger piece of the ~$1tn worldwide eCommerce market (ex China)."
Comment: "AIZ’s fee-based and extended warranty businesses (renters, vehicle, and smart phone) should see strong revenue growth, thanks to increasing consumer demand, higher take-up rates, and expanding partnerships," Kai Pan said.
"Its recent acquisition of The Warranty Group broadens its distribution partners and its global presence, helping to drive more revenue growth."
Comment: "In our view,an expanding solution portfolio and strong value proposition positions Atlassian for durable 30%+ revenue growth, on the back of: 1) continued expansion of the customer base, 2) further penetration into existing customers, and 3) exerting pricing power with ongoing price hikes," Weiss said.
Comment: "We believe the strong base business, which generated ~$1.3B in sales in 2017, coupled with a diverse and promising pipeline that could generate blockbuster drugs makes BioMarin a unique large cap biotech story," Matthew Harrison said.
"Key secular tailwinds for BioMarin, in our view, include a low probability of generic/biosimilar competition to BioMarin’s base business and a deep and wide pipeline with drugs that could launch by 2020."
Comment: "As the leading players in online travel, Booking and Expedia continue to benefit from secular growth as travel dollars shift online," Nowak said.
"The $1.3 trillion global travel industry remains a highly fragmented market and both BKNG and EXPE look well positioned given their scale advantages and portfolio of brands. In all, over the next 3 years we expect BKNG’s gross bookings to grow at a 13% CAGR and EXPE’s at an 11% CAGR."
Comment: "As the dominant provider of technology to sequence DNA, ILMN stands to benefit from a series of market developments and policy changes that have emerged over the last year," Steve Beuchaw said.
"1) The success of DNA-driven drug administration in immunotherapy by Merck ... 2) Global pharma and government funding for DNA analysis has a stronger growth outlook ... 3) Consumer interest in DNA-derived applications has inflected, evidenced by the 300%+ growth in consumer test orders over the last 2 years. 4) Growing global research funding, with an ongoing mix shift towards genomic research."
Comment: "Intuitive Surgical is the leader in robotic surgery," David Lewis said.
"The company has gained significant adoption within urology and gynecology and is still in the relatively early stages of penetration internationally and within broader procedures (including general surgery)."
Comment: "We believe IQVIA’s unique data assets, therapeutics expertise,and scale differentiate the company relative to other contract research organizations (CROs) and positions it to service pharma manufacturers as drug development increasingly becomes digitalized," Ricky Goldwasser said.
"Over time, IQVIA should benefit from the FDA’s increased focus on modernizing clinical trials design, which has the potential to be a game-changer for biopharma companies, CROs, and new entrants from the technology side."
Comment: "MA's compounding growth drivers include (i) strong global consumer spending, (ii) market share gains, and (iii) the secular shift to card from cash," James Faucette said.
"As the second-largest global card network (behind Visa), MA is well positioned to benefit from market share gains in particular regions and consumer spending trends, which have been fairly resilient even through economic cycles."
Comment: "Proven success in the US and initial international markets provides a roadmap for success in newer markets, with scale and innovation providing Netflix the ability to drive margin expansion," Benjamin Swinburne said.
"Growth in global broadband penetration should increase Netflix’s addressable market, driving member growth and providing further opportunity for Netflix to expand in new geographies."
Comment: "In order to garner more effectiveness and efficiency in information security architectures, we believe the key secular trend in security will be the consolidation of spending towards integrated security platforms," Weiss said.
"Palo Alto Networks stands well positioned to excel within that trend given its leadership in core network security and growing traction into areas such as Endpoint, Cloud,and Security Analytics."
Comment: "We believe Pluralsight is well positioned to help enterprises address the need for IT knowledge while managing an accelerating industrywide talent gap," Brian Essex said.
"Pluralsight offers what we see as a best-in class IT-focused Learning Management Software platform to address this need. The platform is driven by machine learning technology that not only enables a more efficient learning process at the individual level but also enables enterprises to efficiently quantify, develop,and manage talent across technology platforms."
Comment: "With direct participation in key software themes including machine learning, mobile, internet of things, and cloud computing broadly, we believe Salesforce.com remains one of the best secularly positioned names in tech," Weiss said.
"An estimated $200B+ potential market opportunity and $21B of billed and unbilled backlog provides CRM ample runway for 20%+ revenue growth and a 30%+ FCF CAGR through FY24, in our view."
Comment: "Emerging as one of the premier Software as a Service (SaaS) vendors, we see ServiceNow sustaining both topline momentum and garnering further FCF leverage from its building subscription base," Weiss said.
"Breaking out of its core market in IT (an ~$10B opportunity), ServiceNow addresses a broader opportunity of workflow automation across the entire enterprise ($45B opportunity)."
Comment: "We argue that ULTA is one of a few retailers with store growth (+8% in 2019), expanding gross profit pools,and improving EBIT margins, enabling the business to compound earnings over time," Simeon Gutman said.
"This stands in stark contrast to many retailers that are delivering 'profitless growth' characterized by decent SSS growth but declining EBIT dollars and margins."
Comment: "Veeva started out as a purely vertical provider of SaaS-based Sales Force Automation tools, and is now actively working to parlay its leadership position in Life Sciences toward expansion into adjacent verticals," Stan Zlotsky said.
"With a number of early customer wins, Veeva has greatly expanded its addressable market (TAM) from $5B at IPO to $9B+ today,according to management."
Comment: "Vertex is a biotech company that focuses primarily on cystic fibrosis (CF)," Matthew Harrison said.
"The company’s CF therapies Kalydeco and Orkambi collectively generated ~$2.2B in sales in 2017, and a third therapy (Symdeko) was approved in early 2018, which we believe could generate ~$750M in sales for 2018E. Furthermore, Vertex is developing a triple combination therapy that has generated strong late-stage data and could address a large portion of the CF market."
Comment: "We believe the Workday story yields multiple dimensions for sustaining strong top-line growth, combined with best in class unit economics, should drive margins significantly higher, resulting in strong FCF growth long-term," Weiss said.
"With a cloud platform encompassing the Human Capital Management (HCM), Payroll, Financial Accounting, Financial Planning, and Business Intelligence markets, Workday directly addresses some of the largest areas of spend in application software resulting in an addressable opportunity that we estimate has increased from ~$40B at the time of its IPO to ~$80B today."