Stockpickr: Trade Like Morgan Stanley

The Focus List mentioned above has had above-average returns and is worth looking at closely. It represents the highest conviction ideas of all of Morgan's analysts. The list is U.S. focused and consists of 12 equally weighted stocks. Since inception (June 2004), the Focus List has returned 48.9%, vs. 31% for the S&P 500. Year to date, the Focus List is up 5.2%, vs. 0.8% for the S&P 500.

The three themes this year are:

1. A focus on mispriced growth,
2. A focus on high-growth, high-return potential and
3. A focus on rising return on equity stocks.

Morgan believes that these stocks have the best potential to buffer any pullback that might occur this year.

The newest addition to the list is Merck(MRK Quote), which Morgan's adding to its "Mispriced Growth" bucket. The firm states in the report:

Similar to our analyst Jamie Rubin, we think that litigation risks are declining at the same time that the benefits of its pipeline are increasing. In particular, Januvia and Gardasil appear to be promising drugs, and we think that long-term estimates are still poised to rise closer to management's predictions of $4.00-plus by 2010 (the Street is at $3.51). As a result, Healthcare moves from equal-weight to overweight in our sector allocation. We certainly recognize that a Democratic Congress will be tough on Healthcare, but we think Merck is a good, idiosyncratic story.

While Morgan's saying Merck is a mispriced growth story, it's worth noting that famous value investor David Dreman also counts the pharmaceutical company among his holdings. The investment makes sense. If Merck reaches Morgan's estimates of $4 a share in earnings and presumably double that or more in EBITDA, then it will be trading at just 7 times cash flows when taking into account its strong net cash position of $2.2 billion.

Dreman is one of the greats, and his returns, 17% annually since inception, demonstrate it. His fund's Web site states: "We believe that the markets are not perfectly efficient and that, in particular, behavioral finance plays a considerable role in investor actions and over-reactions and subsequently in stock price movements." For the rest of his portfolio, check out Dreman's portfolio page on Stockpickr.