Buy these stocks with fortress balance sheets to win in the slowing economy, Morgan Stanley says

Published Mon, Apr 10 202311:00 AM EDT

Companies with strong balance sheets have a downside cushion and can find unique opportunities during a slowing economy, according to Morgan Stanley. Corporations with high amounts of cash on their balance sheets can take advantage of a slowing economy by buying back their stock or acquiring businesses at discounted prices, said Morgan Stanley strategist Todd Castagno. He said these companies can also generate substantial income from interest. On the other hand, companies with floating-rate notes — which can move periodically to align with interest rate changes — will need to start earmarking cash for outstanding debt if the economy slows. "We've identified companies with strong balance sheets and sufficient liquidity, that also generate excess returns over their cost of capital," Castagno said in a note to clients. "With sufficient liquidity and solvency to run operations and service debt, these stocks should have better downside protection than the average." Investors have been increasingly focused on the strength of corporate balance sheets amid rising concerns that the Federal Reserve's series of interest rate hikes could tip the U.S. economy into a slowdown or recession. Castagno screened the Russell 1000 , except for financials, real estate and utilities, to find companies with fortress-like balance sheets. Here's the criteria used: Cash-to-enterprise value above 2.5% Positive free cash flow compound annual growth rates over the next two years More than 7.5% return on invested capital expected in the next two years Ratio of current assets to current liability greater than 1 Low leverage ratio with debt-to-equity under 2.5 Investment grade credit rating Positive equity Here's 10 that made the list: Fitness retailer Nike made the list with a cash-to-EV at nearly 7%. The company's debt-to-equity ratio, meanwhile, came in at 1.5. The stock has gained 2.9% so far this year, regaining some ground after shedding nearly 30% in 2022. The stock was also on the minds of peers on Wall Street. On Sunday, BMO analyst Simeon Siegel reiterated his outperform rating on the stock despite some questions. "We continue to favor NKE's size and scale as long-term competitive advantages but remain concerned over hopes for meaningful margin growth," he said. NKE YTD mountain NKE in 2023 FedEx had one of the highest shares of cash compared with total enterprise value at 7.7%. The shipping company said last week that it would combine delivery units as part of a $4 billion cost-cutting initiative. Hasbro was another company on the list that has aimed to trim costs. The toymaker said it would lay off around 1,000 employees, or 15% of its workforce , as it grappled with weak holiday sales. But the news has not helped the stocks equally. While FedEx has jumped around 33% this year after dropping 33% last year, Hasbro has built on 2022's 40% selloff with a year-to-date loss of nearly 15%. Defense stock Northrop Grumman , meanwhile, is one stock with a strong balance sheet that has moved opposite of the broader market. The stock has fallen 13.1% in 2023, giving back some of its 41% gain from last year. By comparison, the S & P 500 has added 6.9% this year after tumbling 19.4% in 2022. NOC .SPX 5Y mountain Northrop Grumman compared with the S & P 500 Life sciences supplier Thermo Fisher also made the list. Morgan Stanley noted the company has a debt-to-equity ratio of less than 1 and cash-to-enterprise value of 3.5%. Thermo is among companies vying for Baxter 's biopharmaceutical unit, Reuters reported last month. Thermo Fisher also opened a manufacturing facility near the University of California, San Francisco medical campus as part of a joint attempt from the school and company to advance cell therapies for difficult-to-treat conditions. Thermo Fisher has advanced almost 3% this year, a relatively modest gain compared to the S & P 500. — CNBC's Michael Bloom contributed to this report.