Morgan Stanley has a ‘simple’ tech playbook, names TSMC and others as stocks to buy right now

Published Thu, Jan 26 20237:57 PM EST

Tech stocks have staged a remarkable comeback this year, as investors flock to the sector once more. The tech-heavy Nasdaq Composite is up more than 8% in 2023, outperforming both the Dow Jones Industrial Average and the S & P 500 . Despite the recent rally, few believe the downturn in tech has bottomed — but Morgan Stanley believes investors should not sit on the sidelines. "The tech playbook is simple: we believe people tend to be very bearish at the bottom of a cycle amid lots of negative headlines and noise, which cause overselling," Morgan Stanley analyst Shawn Kim wrote in a note on Jan. 25. He said investors should not lose sight of the "key indicators that drive stocks as the market always front runs and anyone waiting for the dust to settle will miss the rebound." "Tech investing is often like doing laundry – wash, rinse, repeat. Amid uncertainty, people can lose sight of the big picture, but it is simple as – peak (inventory), trough (pricing) and price action. 2023 should be less about crisis and more about opportunities," he added. Stay invested even if a recession strikes Morgan Stanley believes investors should continue to selectively own Asia tech names even if a widely anticipated recession materializes, given the sector's historical resilience. Semiconductor stocks have historically outperformed the broader market in past recessions, according to Morgan Stanley, with the Philadelphia Semiconductor Index outperforming the S & P 500 by an average of 29 percentage points in the recessions of 2001, 2008 and 2020. "The same is true for the Asia Tech benchmark, which rose 37% on average across these three recessions," the bank said. The S & P 500 returned 5.8% on average. The bank noted that many tech laggards of 2022 have been early winners this year and it expects fundamentals to be the leading driver of the next stage of performance. Stock picks Morgan Stanley recommends investing in commodity and consumer cyclical companies "that will likely be first to come out of the downturn." One of the bank's top plays is the memory chips segment, where it is advising investors to "buy and hold." It believes stock prices in this area have already priced in the worst, and the market is anticipating an inflection. Morgan Stanley's top pick in this space is South Korea's SK Hynix , giving it a price target of 120,000 Korean won ($97.50), representing over 30% potential upside to its Jan. 25 closing price. Morgan Stanley also likes Samsung Electronics on the back of its market share gains, dividend support and potential for growth through M & A. The bank has ascribed a price target of 68,000 Korean won on the stock — an implied upside of 7.3%. Warren Buffett-backed Taiwan Semiconductor Manufacturing Company also makes Morgan Stanley's list. The bank likes the stock as a "secular story that can play out along long-term trends in semiconductors." Morgan Stanley has a price target of 700 Taiwan dollars ($23.10) on TSMC, which implies an upside of around 40%. — CNBC's Michael Bloom contributed to reporting