These companies with strong operating leverage could see big profit upside, Morgan Stanley says

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Morgan Stanley is advising clients to look for stocks of companies that will both be able to keep costs under control and benefit from further economic reopening and fiscal stimulus in the months ahead.

By keeping expenses low as the U.S. economy tries to find its feet, companies will be able to maintain operating leverage and keep income relatively stable before sales fully rebound, wrote Chief U.S. Equity Strategist Michael Wilson.

"Fiscal support of aggregate demand with material cost cuts mean operating leverage should drive earnings growth into next year," Wilson said in a note.

"We have been writing on this dynamic for the last several months," he continued, "positing that a faster than expected pace of reopening and large fiscal stimulus packages that not only support, but actually better the consumer balance sheet in many cases, are creating a positive dynamic for corporate revenues."

Wilson and the Morgan Stanley team ran a screen to determine the large-cap U.S. companies that are cutting costs quicker than their reported sales declines. Those companies, they reasoned, should see "operating leverage flow through such that peak profits will appear again before peak sales."