Morgan Stanley says stock market could bottom next year – but these 2 stocks are already in ‘buy’ zone
Michael Wilson, head of equity strategy at Morgan Stanley, has been one of the most prominent of the past year’s bearish predictors, and although he still sees tough times ahead before, but he also offered some long-term hope.
Essentially, Wilson said the S&P 500 is likely to drop another 20% before bottoming out near 3,100 in the first quarter of 2023. The index entered a bear market in June of this year, when the Federal Reserve started started to raise interest rates aggressively to combat inflation and since then, the index has had a volatile ride. Wilson believes that volatility will only increase as we get closer to the end of the current drop.
“You’re going to make a new low at some point in the first quarter and that’s going to be a great buying opportunity… Because by the end of next year we’ll be looking at 2024, when then income will really go up again,” commented Wilson.
Meanwhile, Wilson’s analyst colleagues at Morgan Stanley pointed to two stocks already in the ‘buy’ zone. These are stocks that have recently hit their own bottom, but still hold a Buy rating from analysts — and offer solid upside potential going forward. We opened TipRanks database to see if there is consensus on these names within the broader analytical community. Let’s take a closer look.
L3Harris Technology, Inc. (LHX)
The first Morgan Stanley pick we’ll look at is L3Harris, a $39 billion defense contractor that represents the modern incarnation of the 2019 merger of L3 Technologies and Harris Corporation. L3Harris offers a wide range of technology solutions to the defense industry, including an important contributor to the critical missile defense and warning segments. The company also offers valuable products in command and control, ISR and SIGINT as well as electronic warfare. The company had sales of more than $17.8 billion last year and is active in more than 100 countries around the world.
In the most recently reported quarter, Q3 of 22, L3Harris had a top total of $4.2 billion in revenue, a result that was flat year-over-year. All in all, the company reported a net loss of $1.56 per share – this reflects a one-time goodwill loss charge of $4.16 per share. By non-GAAP measures, L3Harris had a Q3 EPS of $3.26, a modest 1.5% year-over-year increase, but missing the consensus estimate of $3.39.
Dividend-concerned investors should note that L3Harris had third-quarter operating cash flow of $588 million, including $546 million in adjusted free cash flow. This abundant cash position allows the company to return $386 million to shareholders through a combination of buybacks and dividends. The current dividend is set at $1.12 per common share, or $4.48 annually, and yields a 2.2% rate of return.
L3Harris has recently made aggressive moves to expand its position in the industry through two acquisitions. The first was the purchase of Viasat’s Tactical Data Link products, called Link 16, in a $1.96 billion transaction. This purchase received a regulatory license earlier this week. The second acquisition was the outright purchase of Aerojet Rocketdyne (AJRD) in an all-cash move totaling $4.7 billion. The purchase of AJRD indicates that L3Harris intends to maintain its ability to deliver mission-critical capabilities in the rocket segment.
In terms of trading, L3Harris stock has lost 17% in the past two months. Where does this lead, is a stock that investors need more attention – in the view of analyst Morgan Stanley Kristine Liwag.
“We see LHX as the new tactical value game in 2023,” noted Liwag. “The stock has lagged behind both Defense and S&P QTD peers… We saw this relative underperformance due to the company’s failure to deliver on the company’s Q3 2022 earnings results, lowering our outlook. 2022 and more cautiously in 2023. The share price has since reached a level that is, in our view, too attractive to ignore and we expect LHX to close the valuation gap relative to other peers. Defense’s peer group.”
Going into some details on the recent acquisition of AJRD, Liwag added, “We view this deal as strategic in nature, giving LHX the ability to expand its footprint in the name space. fire and space markets, which we consider to be some of the fastest growing segments of the budget DoD.”
Liwag’s comments support her Overweight (i.e. Buy) rating on the stock and her price target of $278 implies a ~36% upside for the stock over the next year. (To see Liwag’s achievements, click here)
Overall, this defense contractor holds a Medium Buy rating from analyst consensus, based on 15 recent reviews, including 7 Buy and 8 Hold. The stock is trading for $204.81 and an average price target of $268.25 suggests a 12-month gain of ~31% from that level. (View LHX stock forecast on TipRanks)
RingCentral, Inc. (RNG)
Next, RingCentral, is a communications technology company whose software packages provide solutions to many of the communication problems encountered in the modern business office. Essentially, RingCentral products allow users to route phone lines, video calls, screen sharing, call forwarding, and most other telecommunications features through a centralized office server. , making it easier to manage business telecommunications. Additionally, RingCentral’s plans are compatible with many popular office applications, such as Outlook, Salesforce, and Google Docs, and are available on desktop computers as well as handheld tablets and smartphone devices. bright.
RingCentral has seen its stock soar during the pandemic and lockdown of 2020, as people forced to work from home place higher value on business communications systems – and Investors, looking for any spark at the time, pushed the stock price up. Since then, however, the return to a more normal operating environment has shown that many of these companies are now facing the consequences of inflated stock prices and overspending. their recent levels. RNG stock, in that context, is down 82% this year.
Although the company’s stock is falling, RingCentral has continued to rise this year in both revenue and profit. In the last reported quarter, Q3 2022, RNG had total revenue of $509 million, up 23% year-over-year. Finally, the company’s non-GAAP diluted EPS was reported at 55 cents, up 52% from the 36 cents shown in the same period a year ago. Both sales and earnings numbers beat forecasts. This win was driven by a strong increase in ARR (annual recurring revenue), up 25% year-on-year to $2.05 billion.
Morgan Stanley analyst Meta Marshallin her coverage of RingCentral, was aware of the company’s prolonged stock price decline in 2022, but noticed ‘short-term upside’.
“We think the market is missing an opportunity as the company’s free cash flow improves. RNG is currently trading at Revenue <2x24e and P/E ~11x24e, much lower than its peers. We appreciate the bear cases on the RNG. However, at current levels, we think RNG's valuation is reflecting more of a bear-case scenario and ignoring cash flow potential," explained Marshall.
Quantifying RingCentral’s outlook, Marshall rates the stock as Overweight (i.e. Buy), with a $50 price target indicating her confidence in a 47% rally by this time next year. (To see Marshall’s achievements, click here)
Tech-driven companies are known for getting a lot of attention from Wall Street analysts, and RingCentral has no less than 21 recent analyst reviews on record. They scale from 15 to 6 in a Buy over Hold direction, for a Moderate Buy analyst consensus view. The stock boasts an average price target of $51.47, implying a ~52% gain in one year from its current trading price of $33.96. (View RNG stock forecast on TipRanks)
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deny the responsibility: The opinions expressed in this article are those of prominent analysts only. Content is used for informational purposes only. It is very important that you do your own analysis before making any investment.