Having a bearish stance has worked well in 2022, but as in most walks of life, flexibility is often a key ingredient to success. With this in mind Mike Wilson, Morgan Stanley’s Chief US Equity Strategist, thinks it’s more important now than ever to keep an open mind as 2023 approaches.
“After a 12-month period where stubborn bearish paid off, we believe we are now entering the final phase of the bear market where mutual risk must be respected,” said Wilson.
Not that Wilson thinks we’re done with the bear market yet; the strategist doesn’t expect the path ahead to be “smooth” and thinks consensus gains are still “materially too high.”
Nevertheless, Wilson has moved to a more “bullish tactical view,” and this also applies to investors who “need to be more tactical and make choices without regrets.”
Against this background, the banking giant’s analysts have identified two names that they believe make good investment choices in the current environment. Do other analysts agree? According to the TipRanks database, sure; both stocks are rated Strong Buys by analyst consensus and are expected to pick up steam in the coming months.
Palo Alto Networks (PANW)
Cybersecurity is an essential ingredient for any online operation these days, and Morgan Stanley’s first choice we’ll take a look at is a leader in the space. Palo Alto Networks specializes in cybersecurity offerings that range from firewall appliances and software, zero trust network security, security analytics and automation, to professional and educational services, and cybersecurity consulting, among others. The company splits its business into three distinct platforms: Network Security, Cloud Security, and Security Operations.
It’s a model that has protected the stock relatively well into the 2022 bear; the shares may be down 7% year-over-year, but that performance adds up to a far better representation than the tech-heavy NASDAQ’s 29% decline.
And it’s earnings numbers like the last one that have contributed to the relative outperformance. Against a backdrop of other tech stalwarts stumbling badly, the company beat Street’s expectations in its recently released Q1 (Q1) report. Revenue rose 24.8% year over year to $1.56 billion, ahead of $10 million on The Street’s call, while billings rose 27% year-over-year to $1.7 billion. At the other end of the scale, the company supplied adj. EPS of $0.83, slightly above the $0.69 expected on Wall Street.
That achievement has been applauded by Morgan Stanley’s Hamza Fodderwala, who sees much more growth ahead.
“We continue to believe that PANW will be the first $100 billion cybersecurity market capitalization company, or nearly double the current share price in 2 years,” the analyst said confidently. “Our thesis is based on PANW’s broad platform evolution, market leadership in cloud security, and improving profitability after a multi-year investment cycle. The FQ1 results highlighted all of these as the company delivered another strong performance against an uncertain macroeconomic backdrop that saw several security companies downgrade their outlook.”
Accordingly, Fodderwala rates PANW as an overweight (i.e. buy), supported by a price target of $268. The implication for investors? 56% up from current levels. (To view Fodderwala’s track record, click here)
Overall, PANW is getting broad attention on Wall Street and most of it is decidedly positive; of the 36 analyst reviews recorded, 4 beg to be sidelined, but the rest are positive, making the consensus a strong buy. Assuming the $228.24 average target, the stock will be up 32% over the next few months. (See PANW stock forecast on TipRanks)
Bath and body works (BBWI)
Let’s take a sharp turn for the next Morgan Stanley-approved name. Bath & Body Works is a retailer that sells personal care products such as soaps, lotions and other items such as candles and fresheners. The company’s products are distributed through its retail chain, websites and partner locations. While most of its operations are in the United States, it has a fast-growing Canadian and international business.
With consumers’ wallets increasingly tight due to rising inflation, many retailers have struggled this year, and while that was reflected in BBWI’s declining sales, the company has demonstrated operational excellence in handling with the recession. This was evident from the recently published financial report for the third quarter.
While revenue fell 5% year over year to $1.6 billion, the figure beat Street’s expectations by $40 million. But the really good news was the bottom line; the company delivered earnings per share of $0.40, double the analysts’ forecast of $0.20, while also raising its full-year earnings per share outlook to $2.70 from $2.70 3.00 to $3.00 to $3.20. Consensus had that figure at $2.89.
BBWI also saw through the quarter well with inventories up just 10% from the same period a year ago, a performance that was 20+ points better than Q2’s 33% increase. Going forward, the company’s Q4 guide called for annual inventory growth of +mid-teens.
This is a very impressive achievement, says Morgan Stanley’s Alexandra Straton.
“In our view, this could be one of the best inventory results in our reporting this earnings season, and should potentially reduce pressure on promotion and discount-driven margins in 4K and beyond relative to specialty retail peers” , explains the analyst. “This speaks to BBWI’s incredibly nimble and primarily domestic supply chain.”
“We are bullish on BBWI due to its fundamentally attractive business model, continued room for beats & raises, as well as the opportunity to review valuation,” Straton continued.
It is therefore not surprising that Straton rates the stock as Overweight (ie Buy) while the price target gets an increase; the figure moves from $72 to $76, suggesting that stocks will rise 92% higher in the coming year. (To view Straton’s track record, click here)
BBWI also receives strong support from Straton’s colleagues; the ratings split 8 to 2 in favor of Buys over Holds, all culminating in a Strong Buy consensus rating. The forecast calls for 12-month returns of 27% as the average target is $50.27. (See BBWI stock forecast on TipRanks)
To find great ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that unites all of TipRanks’ stock insights.
Disclaimer: The opinions expressed in this article are solely those of the recommended analyst. The content is for informational purposes only. It is very important to do your own analysis before making an investment.