A bearish stance on the wider stock market isn’t keeping Mike Wilson entirely on the sidelines. Morgan Stanley’s chief U.S. equity strategist said the broad market has as bad of a risk-reward ratio as there has been throughout the bear market. And he said the slow pace of an earnings recession can keep institutional clients more exposed than they should be. As the latest earnings season begins winding down and stocks hold up in the face of shrinking Federal Reserve liquidity, Wilson said some in the market are asking: “What will be the catalyst for stocks to fall if they haven’t yet?” Morgan Stanley expects 2023 per-share earnings to come in noticeably below where its peers on Wall Street do. But even with that pessimism, Wilson’s not recommending exiting the equities market. Instead, he’s getting increasingly strategic in his advice. “In the tough macro environment we are in, stock picking remains key,” he said in a note to clients Monday. Wilson screened for stocks that he called “unfairly punished by the market.” To find these, he looked for stocks that have been rated overweight by Morgan Stanley for more than a year and have the potential to rally at least 20%, based on their price targets. The group also has trailing absolute returns over 12 months of -10% or more, and a trailing return over the same time period compared to the industry average worse than -5%. Finally, the stocks have market caps of at least $1 billion. Here are 10 that passed his screen: Morgan Stanley thinks space company Rocket Lab could rally 120% — the most of any stock that passed Wilson’s screen — after plunging nearly 70% in 2022. The company made its first U.S. rocket launch in January. Earlier this month, Amazon reported beating earnings expectations for the fourth quarter , at the same time as it issued light forward guidance. The report came weeks after CEO Andy Jassy said in a memo that the e-commerce giant would cut around 18,000 jobs . “They’re built with human beings, with human labor, with supply chain. They’re built for a pandemic,” said Steve Grasso, CEO of Grasso Capital, on CNBC’s “Fast Money” following the company’s earnings report. “The pandemic is over, so they have to … slowly reduce that head count.” Morgan Stanley expects the stock to gain more than 50% this year after losing about the same amount in 2022. Southwest also passed the screen as the airline attempts to move past a meltdown that was triggered by severe weather during the holidays. The airline canceled around 16,700 flights between Dec. 21 and Dec. 31, resulting in an $800 million hit to pretax earnings, driving a quarterly loss. But the meltdown did not chill Wall Street’s optimism. The majority of analysts still rate the stock a buy, according to Refinitiv, with Morgan Stanley expecting it to rally more than 80% over the next 12 months after sliding slightly more than 20% in 2022. Amid what CFRA analyst Colin Scarola called Southwest’s “fiasco,” he said there was an attractive buying opportunity for the stock and reiterated his buy rating. Fliers would likely look past the cancellations due to the commodity-like nature of purchasing plane tickets, meaning customers won’t abandon an airline so long as prices are lower than competitors — regardless of any hit to the company’s reputation. Match Group , the dating platform known for brands such as Tinder and Hinge, also passed Wilson’s screen. The beaten-down stock lost nearly 70% last year as investors rotated out of growth stocks amid rising fears of a recession, but Morgan Stanley predicts it could gain more than 90% over the next 12 months. In recent weeks, Match announced a series of leadership changes. During its earnings call earlier this month, the company also said it would cut 8% of its workforce. Meanwhile, fourth-quarter revenue came in slightly below the consensus estimate of analysts polled by FactSet. — CNBC’s Michael Bloom contributed to this report
