Morgan Stanley says buy these stocks when the market finally bottoms

Published Mon, Jan 7 20192:40 PM EST

Stocks have bounced back from their multi-year lows and valuations have reached an attractive level for the first time in years, but investors still can't go all in. That's the advice from Morgan Stanley's chief equity strategist Michael Wilson, who recommends buying cyclical stocks like financials and energy when the market finally finds a bottom. That is when the earnings revision breadth bottoms. "We have reached a spot where you need to be buying the cyclicals and lightening up on the defensives and overpriced growth stocks.The cyclicals have already discounted a much more severe deceleration in global nominal GDP growth than what our economists expect," Wilson said in a note on Monday. "The bottom line is the overall market will have a hard time bottoming until the earnings revision breadth bottoms.This will likely keep things choppy and volatile and may even lead to an eventual re-test and break of the lows we saw on Dec. 24," he added. The analyst screened the S & P 1500 for stocks with valuations that may be discounting a cyclical slowdown, and financials, industrials, and discretionary (homebuilders and cruise lines) are where the potential opportunities lie. Healthcare, utilities, and tech have higher valuation risk. Harley-Davidson , Tapestry , Goldman Sachs are among his recommended stocks. While the equity risk premium has reached levels not seen since 2016, valuations can still come down further and earnings can be cut more than what is already priced, noted Wilson, who previously predicted a 50 percent chance of an earnings recession in 2019. Investors should be in a wait-and-see mode as the markets are still not out of the woods with the Federal Reserve's outlook and negative economic data points, he pointed out. US manufacturer growth hit new lows on multiple fronts last month with the US manufacturing PMI (Purchasing Managers Index) hitting a 15-month low. Last week Apple also issued warnings of revenue slowdown, blaming a slowing Chinese economy for the shortfall. "The weak PMI and Apple's miss last week are unlikely isolated incidents. We suspect there are more "Apples" looming out there as we enter fourth quarter earnings season; but it's difficult to ascertain exactly where those risks are the greatest," Wilson said.

Traders work on the floor of the New York Stock Exchange (NYSE) on the last day of the trading year on December 31, 2018 in New York City.

Spencer Platt | Getty Images

Stocks have bounced back from their multi-year lows and valuations have reached an attractive level for the first time in years, but investors still can't go all in.

That's the advice from Morgan Stanley's chief equity strategist Michael Wilson, who recommends buying cyclical stocks like financials and energy when the market finally finds a bottom. That is when the earnings revision breadth bottoms.