"Trade Like Goldman Sachs"
, a Stockpickr column I wrote a couple of weeks ago, I offered some of the bank's picks and pans gleaned from its various trading groups, analysts and funds.
is another investment firm that's equally as useful to follow.
Morgan's analysts and research are top notch, and its mutual funds rank among the highest-rated funds. As the prime broker and institutional broker for many of the world's top hedge funds and mutual funds, Morgan has access to the information flow of the best of the best. On top of that, the company is involved in many of the market's largest initial public offerings and deals.
Here are some of the Morgan Stanley-related portfolios that I track on Stockpickr:
- Morgan Stanley Focus List: These are the combined 10 best picks of all of Morgan's analysts. What's important about its focus list this year is that the firm is neutral on equities, so, given that stance, it's enlightening to see which equities it believes will still outperform.
- The portfolios of some of its best mutual funds:
- Morgan Stanley LBO Candidates: Morgan ran a screen to identify potential leveraged-buyout candidates. The screen -- which looks for beaten-up stocks with lots of cash, reasonable debt levels and strong cash flows -- was featured in the Dec. 10, 2006, issue of Barron's.
- Morgan Stanley's Favorite Dividend Plays: Chief U.S. strategist Henry McVey believes retiring baby boomers are going to start positioning their accounts for income rather than asset accumulation and that they'll go after stocks with high yields and strong earnings growth. The top 25 stocks he identifies are listed in this portfolio, based on yield.
- Morgan Stanley Institutional Small Company Growth Portfolio: These are the small-cap stocks with fast earnings growth that Morgan expects will see continued growth in the years ahead.
- Morgan Stanley Financial Services Fund: If anyone knows financial services, it's Morgan Stanley. This fund was up 17% last year and 10.3% a year over the past five years.
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
. Year to date, the Focus List is up 5.2%, vs. 0.8% for the S&P 500.
The three themes this year are:
A focus on mispriced growth,
A focus on high-growth, high-return potential and
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
, 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 thebenefits 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 wethink 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
Also on the Focus List is
, Morgan Stanley analyst Mary Meeker's favorite pick. eBay falls into Morgan's "High Growth" bucket.
Meeker is often unfairly tainted with the dot-com bust smear, but the reality is that she was probably the best analyst out there all through the '90s, calling the entire Internet boom from even before the Netscape IPO and making a ton of money for her clients. It took guts to recommend a fledgling AOL at (a split-adjusted) 50 cents when it only had 300,000 subscribers and was disconnecting people all the time.
Meeker was also dead-on about who the leaders of the boom would be when she famously stated: "Go with the leaders. Remember Microsoft vs. Lotus; Cisco vs. Wellfleet; Dell and Compaq vs. Everex."
Unlike some of her peers, Meeker was also cautious about the exuberance she was seeing, telling
in December 1999(!): "I think there will be an e-commerce shake-out in the first quarter of 2000." Throughout the bust, she never lost faith, even when everyone else was considering the Internet to be a scam at best. The rise in broadband, video, e-commerce and particularly online advertising has confirmed her faith.
In particular, Meeker was always very bullish on eBay, even before its IPO. At the time, the auction site had 4 million classified listings, and the entire newspaper industry had 141 million classified listings. Today eBay has more than 1 billion classified listings while newspapers have barely 100 million.
Now, instead of trading at 2,000 times earnings as it did in 1999, the stock trades at 22 times forward earnings and has a strong cash position of more than $3.5 billion. And unlike most dot-com-era stocks, eBay is trading higher than its 1999 lofty valuation days.
eBay's stock is almost 50% below its lows from two years ago because of its acquisition of digital phone company Skype, which hasn't integrated as easily as investors would have liked. But perhaps people are throwing out the baby with the bathwater because the fundamentals of the underlying business continue to improve.
Another believer in eBay is technology and value investor
, "The Warren Buffett of the Middle East" who made his fortune, in part, by following Meeker into AOL in the early '90s.
eBay is also listed among the
. eBay is No. 4 on the list, right ahead of No. 5,
, and right after No. 3
, No. 2
, and No. 1
, which owns popular social-networking site MySpace.
Other stocks on the Focus List include tech company
, tobacco company
and financial services "cousin to Morgan Stanley"
Again, to get the comprehensive view of all of Morgan Stanley's research and ideas, check out these portfolios on Stockpickr:
- Morgan Stanley Focus List,
- Morgan Stanley Institutional Small Company Growth Portfolio,
- Morgan Stanley Financial Services Fund,
- Morgan Stanley LBO Candidates and
- Morgan Stanley's Favorite Dividend Plays.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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