These cheap stocks do well under low or high rates, Morgan Stanley says

Published Wed, Mar 3 202112:16 PM ESTUpdated Wed, Mar 3 202112:59 PM EST

Volatility in the bond market is mirroring the equity market right now, so it could be beneficial if investors pick stocks that perform well in a high- and low-rate environment, according to Morgan Stanley. The yield on the U.S. 10-year Treasury is hovering around 1.47%, which is below its long-term trend; however, if the ongoing rally in rates persists, a high-rate regime could be on its way. Morgan Stanley's U.S. rate strategist expects the 10-year note to rise to 1.7% by the end of 2021. "Hence, we suggest investors focus on undervalued names in sectors and industry groups that tend to do well both in low and high rate regimes," Morgan Stanley quantitative strategist Boris Lerner told clients. The Wall Street firm used its longer-horizon systematic stock selection model to find stocks that perform well in a rising-rate environment. The model is tilted towards undervalued smaller-cap stocks which tend to outperform in this market climate. The screen highlights stocks from the S & P 500 energy, materials and capital good industry groups that are also rated a buy from Morgan Stanley analysts. L3harris Technologies , Lockheed Martin , Northrop Grumman , Stanley Black & Decker and Raytheon Technologies are the capital goods stocks on Morgan Stanley's list. Lockheed Martin reported profit growth of 20% last quarter, and CEO Jim Taiclet said megatrends do support a stable defense budget going forward. Northrop Grumman CEO Kathy Warden was a bit more tempered in her outlook for defense spending, though she did say the new Biden administration is assembling an experienced team that understands the threat environment. Raytheon Technologies reported better-than-expected fourth quarter earnings, with improving free cash flow levels. The company's CEO said Raytheon will double its free cash flow from 2020 to 2021. Raytheon is sitting with about $10 billion on its balance sheet, and CEO Greg Hayes said some of that would go to share buybacks. Linde , Eastman Chemical and Corteva are the materials companies on Morgan Stanley's list. Morgan Stanley named Diamondback Energy and Marathon Petroleum as the best energy names in a high- and low-rate environment. Diamondback Energy is one of the most-loved stocks on Wall Street. Of the 33 analysts that cover the name, 30 have a buy rating on the company, according to FactSet. The other three ratings are hold. — with reporting from CNBC's Michael Bloom.

Trader passes by a screen that displays trading information for United Technologies and Raytheon on the floor of the New York Stock Exchange (NYSE) in New York City