Here are Morgan Stanley's favorite quality stocks to buy as bear market nears end

Published Tue, Mar 21 202312:08 PM EDTUpdated Tue, Mar 21 202312:34 PM EDT

As investors start preparing for the end of the bear market, Morgan Stanley has identified a number of stocks it expects to outperform once the next bull market begins. The Wall Street investment bank is anticipating a stronger earnings picture in 2024. It also sees several potential cyclical and secular catalysts of the next bull market, including a more accommodative monetary policy, a global growth recovery, artificial intelligence and pent-up demand in investment and capital investment in parts of consumer services. To identify companies it believes are the best long-term picks, Morgan Stanley's analysts looked for the highest-quality companies in each sector of the market that are "likely to strengthen their sustainable competitive advantage." Return on net operating assets, management strategy, capital structure and stock buybacks and dividends were also taken into account. However, valuation wasn't necessarily part of the equation. Instead, the analysts identified the best franchises "whose business models and market positions would be increasingly differentiated into 2025," Morgan Stanley wrote in a note Tuesday. Here are 10 of the names that made the cut. Alphabet will benefit from the continued acceleration of the digital transformation that began during Covid, as well as the boom in artificial intelligence, analyst Brian Nowak wrote. Search should see significant incremental revenue with next generations of AI leading to higher relevancy, while generative AI and improved algorithm matching and advertising attribution should be a tail wind for YouTube, he said. "We also remain confident GOOGL faces more manageable incremental costs. We see management focused on durably reengineering the cost base and see GOOGL working to improve AI compute cost efficiency at the infrastructure, model and application layer, which builds confidence that margins won't compress over the long term," Nowak said. He has an overweight rating on the stock and a $135 price target, which suggests about 33% upside from Monday's close. Meanwhile, Costco Wholesale is one of the best companies in the retail sector, said analyst Simeon Gutman. Costco's Kirkland Signature private label, which has grown to more than $75 billion in revenue, differentiates the company from rivals, he said. As inflation-weary consumers look to trade down to less expensive products , they are turning to private label, or store-branded products, which bring higher margins for retailers. "We believe Covid, inflationary pressures on the consumer, and gas price volatility have strengthened COST's value proposition, with likely higher membership stickiness and spending consolidation at COST relative to past years," Gutman wrote. He has an overweight rating on Costco and a $520 price target, which implies a little more than 6% upside from Monday's close. In the energy industry, Exxon Mobil has competitive positioning with its robust free cash flow and high-return growth products, analyst Devin McDermott said. Exxon will benefit from what he expects to be a multiyear period of strong oil and gas prices. Exxon Mobil is also an industry leader in decarbonization, which should help de-risk longer-term cash flows during an erosion in oil and gas demand, said McDermott, who has an overweight rating on the stock. His price target suggests the stock could rally more than 11%. While JPMorgan Chase was initially hit, along with the entire banking sector, when Silicon Valley Bank collapsed, it is one of Morgan Stanley's favorite stocks in the sector . JPMorgan is now advising the beleaguered First Republic Bank on strategic alternatives, including a capital raise, sources told CNBC's David Faber . Analyst Betsy Graseck expects positive operating leverage in 2023 for JPMorgan, with revenues up 12% and expenses rising a slower 8%, year over year. JPM's consumer and community bank unit is also taking deposit share, thanks to 500 new branch opened since 2017, she said. Graseck has an overweight rating on JPM and a $173 price target, which implies 36% upside from Monday's close. And Yum Brands , the parent of KFC, Taco Bell and Pizza Hut, is one of the few globally scaled and diversified restaurant-chain operators that Morgan Stanley believes can sustain close to 6% store growth and high single-digit system sales growth over the next several years. "YUM's franchised model is among the most asset-light, cash generative, and offers lower earnings volatility," said analyst Brian Harbour. He has an overweight rating on the stock. His $155 price target suggests the stock could rally more than 20% from Monday's close. — CNBC's Michael Bloom contributed reporting.