Morgan Stanley: Buy these stocks before earnings

Published Tue, Jul 14 20159:06 AM EDT

In a note to clients, Morgan Stanley recommended investors buy a group of stocks it expects to rally on earnings. "Our analysts believe that one or more imminent events will drive the share price materially over the next 15 to 60 days," read Monday's note, pointing to a select list of names with "high conviction going into earnings season." What makes the list unique, according to the report, is the firm's contrarian view on some of these names, which significantly differs from the rest of the Street. In many cases, the potential catalyst moves beyond earnings to other upcoming events, setting a win-win scenario for some of these stocks. One of those names is Amazon , which reports earnings on July 23. Source: FactSet "Amazon shares do not appropriately price Amazon's eCommerce business, which we see as the major driver of profit improvement near-term," wrote Morgan Stanley analyst Brian Nowak. Based on his analysis, Amazon's accelerating revenue growth, expanding gross margin and improving profitability in the core e-commerce business are bullish catalysts for the stock to move higher, while Amazon Web Services provides another incremental growth driver. Shares of the online retailer are up 47 percent this year, compared with a gain of 9 percent for the S & P consumer discretionary sector. But even with the strong gains in 2015, Nowak predicts the stock could trade as high as $600 share in the near term, implying a 32 percent rally from here. In contrast, FactSet said the rest of the Street has a consensus target price of $470, which is about where the stock is currently trading. Another name on the list is Bank of America , which is expected to report second quarter results on Wednesday, and follows better-than-expected earnings Tuesday from rival JPMorgan. Source: FactSet According to Morgan Stanley's estimates, BofA will show strong net interest income and expense management, while a potential interest rate later this year should also bode well for the stock. "BAC should benefit the most in our group from rising rates, and we expect further upside as the stock begins to reflect the $4.6bn revenue benefit that a 100bp rise in rates should provide," wrote Morgan Stanley analyst Betsy Graseck. "BAC is one of the most attractively valued banks we cover," she added, highlighting valuations as another catalyst for the stock. Shares of the bank are down 5 percent this year compared with a gain of 0.7 percent for the S & P financial sector. Graseck's bull case scenario calls for a 47 percent rally in the stock to $25. That view differs from the rest of the Street, which has a consensus target price of $18, implying an 8 percent gain from here. Third on the list is biotechnology firm Biogen , which is expected to report earnings on July 24. Source: FactSet "We believe the base business creates supportive value ahead of the significant catalysts in 2H15 [second half]," wrote Morgan Stanley analyst Matthew Harrison, pointing to data that will be presented at the Alzheimer's Association International Conference later this month. "We believe that EU Tecfidera and Hemophilia can support upside while the differentiated Alzheimer's franchise provides significant valuation support," he added. Shares of Biogen are 18 percent below their all-time high set in March but remain positive for the year, up 15 percent. According to Harrison's estimates, the stock could trade as high as $705 or 80 percent higher from here. That view differs from the rest of the Street, which has a consensus target price of $473, implying a 21 percent move higher, according to FactSet. Other stocks that made the list include Rockwell Automation , Caterpillar , Carlyle Group and XPO Logistics . Read More Trader: Bet on these 5 winning trends

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In a note to clients, Morgan Stanley recommended investors buy a group of stocks it expects to rally on earnings.

"Our analysts believe that one or more imminent events will drive the share price materially over the next 15 to 60 days," read Monday's note, pointing to a select list of names with "high conviction going into earnings season."

What makes the list unique, according to the report, is the firm's contrarian view on some of these names, which significantly differs from the rest of the Street.

In many cases, the potential catalyst moves beyond earnings to other upcoming events, setting a win-win scenario for some of these stocks.

One of those names is Amazon, which reports earnings on July 23.