Morgan Stanley Calls Out Two Market Favorites

The Analysts Are In Control Now

With the 3rd quarter reporting season in the bag, there isn’t much to drive the market other than data, outlook, and the analysts. The data is positive and points to an ongoing economic rebound, that’s good, but expansion slowed over the last month along with rising COVID-19 fear, that's bad. The sentiment is optimistic with all the vaccine news but there is a healthy dose of caution, earnings are better than expected and the forecast is good but uncertainty fills the air. Not only is there COVID-19 to worry about but the uncertainty of Biden’s administration is present and neither is going away soon.

As for the analysts. The analysts have been upping their targets for the 4th quarter earnings season and, quite frankly, that trend has just begun. Based on the performance put in by the S&P 500 in the 2nd and 3rd quarter the earnings rebound is accelerating and the analyst’s estimates are still far too low. What this means is that, despite whatever fears are present, there is a rising tide of earnings-focused sentiment to drive the market higher.  There may be a pullback in the market before the Q4 earnings season but, so long as nothing emerges to derail the economy, the S&P )NYSEARCA:SPY) will bounce back and strongly to boot.

Advanced Auto Parts Gets More Attractive

Advanced Auto Parts (NYSE:AAP) reported earnings earlier this month delivering results well above the consensus. Not only are the post-pandemic gains sticking, but the company’s growth is also accelerating. I myself called out the stock as a buying opportunity citing the value, the growth, the balance sheet, and the dividend, and nothing about that has changed.

Morgan Stanley’s Simeon reiterated the Overweight rating and upped the price target to $190 from $148. In his view, the company’s entire growth trajectory has been altered for the better. The $190 target matched the Wall Street high and implies a 25% upside from today’s prices.

"The business is performing well and keeping pace with overall DIY outperformance. In light of strong results over the past two quarters, we have recalibrated our expectations higher for the next couple (of) years. We also have greater conviction that AAP's transformation is generally on track; we are modeling 1%/2.5% comps in 2021/2022 despite tough compares generated by strong 2020 results,” 

Constellation Brands A Top Pick In The Staples Sector

Constellation Brands (NYSE:STZ) earned a spot on my watch list over the summer when it became clear alcohol sales weren’t taking the hit some had thought. Simply put, the company delivered strong results and the continuation of restructuring efforts that have the company on track for sustained growth. Trading about 21X this year’s and next year’s earnings the stock is also a value compared to its peers in the Consumer Staples sector. Diageo trades closer to 30X its earnings as do other, more mainstream, consumer staple companies.

Morgan Stanley analyst Dara Mohsenian says "STZ is our top overall Staples pick for our North America coverage. We forecast a potential re-acceleration in sequential beer topline growth going forward back to the ~HSD% range....Improving beer revenue growth should drive above-consensus total company revenue and EPS estimates, and act as a catalyst for the stock, particularly with (a) very attractive valuation of ~14x EBITDA, well below high-growth beverage peers."

Ms. Mohsenian’s price target is the Wall Street high of $240, about 17% upside, versus the consensus $203. The stock is trading near-consensus now but there is this; the consensus has been moving upward over the past two months and most analysts are still neutral on the stock. A few more upgrades may be all it takes to get this thing moving again.