Editors' Pick: Originally published Feb. 19.
In case of a recession, is it better to choose stocks through fundamental or technical analysis?
U.S. markets are grappling with a rocky start to 2016 that has dragged broad indices down into correction territory (despite this week's break from recent lows). The massive volatility seen since the start of the year has prompted speculation that the U.S. is headed for a recession.
Morgan Stanley asked each of its analysts covering U.S. companies to identify the stocks from their coverage universe that would represent top names to own in a macro downturn, as well as stocks most unfavorably exposed in the event of recession.
"While we are by no means forecasting a recession for the U.S. at this time, we do contemplate the effects such a macro environment could have, and offer stock ideas if a downturn does occur," the Feb. 5 report said.
Of the 60 companies named, 19 made up a list of best stocks to own in a recession, which TheStreet covered earlier this month.
But is fundamental analysis the best way to approach stock picking in the event of a downturn? Real Money's in-house technical analyst Bruce Kamich puts his spin on the stocks Morgan Stanley said investors should own if the economy falls into a recession.
Do the analyses match? Read on to find out.
1. Acceleron Pharma
Morgan Stanley: "We view XLRN as a relatively safe growth story within small-mid cap biotech, as the company's lead assets advance into Phase 3, supported by a favorable collaborative agreement with Celgene, strong balance sheet, emerging wholly owned assets, and increasing prospects for strategic optionality," analyst Andrew Berens wrote.
Pharmaceutical giant Celgene (CELG - Get Report) is bearing the development costs of Acceleron's leading drug-development programs, including luspatercept, which boosts the red blood cell count in patients with rare blood disorders, and sotatercept, used to treat anemia, the analyst added.
Kamich: Amgen (AMGN - Get Report) has largely traded sideways the past 12 months, but with some downside probes. Despite declines in September, January and February, the On-Balance-Volume line has been steady, suggesting little in the way of liquidation by longs.
Morgan Stanley: "We would expect Amgen to outperform in a recession scenario as most of its portfolio of drugs is for oncology therapy or directed at patients in Medicare, two groups who are unlikely to limit their use of medicines in a recession," analyst Matthew Harrison wrote.
As well, Harrison sees biotech developer Amgen's strong dividend yield, high cash flow and solid balance sheet as three key assets in a recession.
Morgan Stanley: "We expect the Medicaid managed care names will benefit under a recession scenario and particularly favor Centene. If unemployment were to increase, members would likely shift from commercial insurance to Medicaid driving growth. In addition, healthcare reform has expanded coverage criteria ensuring that more potential members would be eligible," analyst Andrew Schenker wrote.
Further, Centene should benefit via earnings accretion and other synergies from its pending acquisition of HealthNet, he wrote.
Morgan Stanley: "P&C stocks are generally defensive and outperform in a recessionary environment," analyst Kai Pan wrote.
Chubb's management is focused on "deep integration" of its recent acquisition of ACE and "controlling the controllable," such as expenses, Pan wrote.
5. Church and Dwight
Kamich: Church and Dwight (CHD - Get Report) had a temporary breakdown under the 2015 lows in January but quickly recovered its composure to rally above the December highs. Prices are back above the 50-day and 200-day moving averages.
Morgan Stanley: "CHD should be a strong safe haven in a recessionary period given: highly defensive product categories, such as laundry/cleaning supplies on the household products side and condoms/pregnancy kits on the personal care side; CHD has a more balanced portfolio than most [consumer products] peers which is nearly evenly split between value and premium."
The company sees 82% of sales from the U.S., which limits its FX risk. Church & Dwight also has a strong balance sheet, Morgan Stanley analyst Dara Mohsenian said.
Kamich: The $54-to-$52 area on Comcast (CMCSA - Get Report) has attracted buyers on at least three occasions. Meanwhile the On-Balance-Volume line has been edging slightly higher this year -- a sign of fresh accumulation.
Morgan Stanley: Comcast's "below-peer leverage and limited international exposure make it more defensive in the event of a global slowdown," analyst Benjamin Swinburne wrote.
7. Crown Castle
Kamich: Crown Castle (CCI - Get Report) has been in a wide trading range the past seven months, but dips into the $78-to-$76 area appear to have been bought while rallies to the top of the trading range around $88 have not produced significant liquidation. It looks like buying interest just takes a break on the rallies.
Morgan Stanley: "Crown Castle is the only publicly traded wireless tower company with a 100% U.S. dollar revenue base. It has some $20 billion of contracted lease revenues in backlog, with the average lease contract having a six-year remaining term, with annual lease escalators of more than 3%. Demand is driven by the secular growth in wireless broadband data traffic," analyst Simon Flannery wrote.
8. CVS Health
Kamich: All stock market rallies have corrections, and that also goes for individual names. CVS Health (CVS - Get Report) , a key holding in Jim Cramer's Trifecta Stocks portfolio, is no exception. After a peak in early August, CVS traded lower with the On-Balance-Volume line matching the dips. Recently prices made a new low, but the OBV line did not. This bullish divergence could be interesting going forward.
Morgan Stanley: "CVS' unique portfolio of assets and integrated PBM/retail model positions the company to continue to gain market share and is aligned with trend towards lower cost healthcare settings that are likely to do better under a recession scenario," analyst Ricky Goldwasser wrote.
Goldwasser estimates that CVS will grow its per-share earnings by approximately 13% in 2016 and 2017. "For reference, CVS outperformed the S&P 500 by ~11% in 2008," during the worst of the financial crisis, Goldwasser wrote.
Kamich: Danaher (DHR - Get Report) , another Trifecta Stocks holding, has been bought on every test and dip into the $84-to-$82 area. The On-Balance-Volume line gained in the May-July period, telling us that buyers were more aggressive, but those summer gains have not been reversed -- a positive signal.
Morgan Stanley: Danaher is "the most defensive stock in the industrial comp group, in our view, due to ~60% exposure to Healthcare (Dental, Life Sciences) and ~50% recurring revenue stream via consumable sales; This 60% of the portfolio would have experienced only a 3% organic sales decline if had been a standalone business in 2009," analyst Nigel Coe wrote.
10. First Republic Bank
Kamich: First Republic Bank (FRC - Get Report) had a very positive looking chart (higher lows and higher highs) for much of the past 12 months. A decline in February broke the prior low in January, weakening the chart picture. But the On-Balance-Volume line did not match the price decline. Longs held their positions, and $56 looks to be pretty important support.
Morgan Stanley: "First Republic is one of the most defensive stocks in the midcap bank universe, given its sole focus on high-net-worth clients and its multi-decade track record of pristine underwriting. Since inception in 1985, the company has had an annual net charge off ratio of less than one basis point -- the lowest by far of any of our covered banks, due largely to its conservative underwriting (including the financial crisis period)," analyst Ken Zerbe wrote.
11. H&R Block
Kamich: H&R Block (HRB - Get Report) recently turned back above the 50-day simple moving average. Note that in the trading since August that while prices have swung up and down in a $7 range, the On-Balance-Volume line has been moving sideways. Longer-term investors in HRB have been largely staying put.
Morgan Stanley: The tax return business is resilient and a "recession could even be a tailwind to this opportunity if employees leave corporate plans and join exchanges or file for more exemptions," Thomas Allen wrote.
The company is also well-positioned in any market environment given strong recurring "free cash flow (6% current yield) and an under-levered balance sheet (2.2x debt / EBITDA)," he wrote.
Kamich: Hanesbrands (HBI - Get Report) has been in an irregular downtrend the past 12 months, but volume has been light and the On-Balance-Volume line has been relatively stable. This suggests that sellers are not aggressive and HBI has been "falling of its own weight."
Morgan Stanley: "Underwear is the most staples-like category within apparel and footwear," said analyst Jay Sole, which makes Hanesbrands a solid bet. The company's dominant market share isn't likely to change much in a recession, he said.
13. Kraft Heinz
Kamich: We do not have a lot of price history on Kraft Heinz (KHC - Get Report) , a key holding in Jim Cramer's Action Alerts PLUS charitable trust, to work with, but we can say that dips to $70 have been bought: every decline since August. Very impressive.
Morgan Stanley: "We believe KHC offers multiple levers to grow earnings and unlock shareholder value even in the event of a macro slowdown in the U.S.," analyst Matt Grainger wrote. "Additionally, KHC also offers a healthy 3.0% dividend yield which should prove supportive in the event of broader weakness in U.S. equity markets."
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Kamich: A ruler won't work, but Kroger (KR - Get Report) has been in an uptrend the past 12 months. Support was first found at $34 and has now moved up to $36 -- a higher low. The highs have also moved up first at $38, then $39 and then the $42+ area.
Morgan Stanley: "Kroger is a consistent top and bottom line grower, and we expect continued share gains within the food retail industry," analyst Vincent Sinisi wrote. "Conventional and natural/organic offerings at value price points provide customers with a wide range of products to suit a variety of health/wellness and/or financial needs during any macroeconomic environment."
Kamich: I don't know if it is the all-day breakfast menu or what, but October marked a turning point for McDonald's (MCD - Get Report) . The MACD oscillator is above the zero line and a new "go long" signal could come soon.
Morgan Stanley: "While MCD's U.S. business is not immune from a macroeconomic slowdown, it should be more resilient than most, given its heavy emphasis on value, accelerating momentum through all-day breakfast, and improved operational changes," analyst John Glass wrote.
Also, McDonald's franchised system generates more than 80% of its profit through rents and royalties, yielding substantial free cash flow. The company has committed to a goal of $30 billion of cash return to shareholders for the three years through 2016, he wrote.
Kamich: Yes,Perrigo (PRGO - Get Report) has been in a downtrend for much of the past 12 months, but the rate of decline since late September has slowed. There is a bullish divergence between the lower lows in price since September and the higher lows from the momentum study. Slowing momentum tends to foreshadow a rally.
Morgan Stanley: Perrigo, an industry leader in over-the-counter drugs, is a well-positioned pharmaceutical company even in a recession.
"First, consumers should be more likely to opt for cheaper private label OTCs vs branded OTC drugs, enabling Perrigo to win incremental market share," analyst David Risinger wrote. "Second, we believe Perrigo's private-label consumer business (50% of rev; 34% of operating income in 2016) is set to grow strongly in the short term, driven by important new launch opportunities (such as the Mucinex family, Flonase, and Nasacort) and a stabilizing competitive environment from J&J and Novartis. Third, Perrigo may be able to capitalize on lower valuations for strategic targets and pursue bolt-on acquisitions."
Kamich: This short-term chart of PG&E (PCG - Get Report) was neutral-looking for months, and then PCG exploded on the upside in January. The OBV turned up, and prices are above the 50-day and 200-day averages. The MACD oscillator has also followed the trend up.
Morgan Stanley: "Earnings growth is highly visible and in our view is independent of economic activity," wrote analyst Stephen Byrd. "With a 3.3% dividend yield and above-average EPS growth relative to utility peers, growth that is not dependent on power demand fluctuations, coupled with a 2018e P/E multiple that is 8% below peers, we view PCG as a defensive value play with strong current income."
18. Verisk Analytics
Kamich: During the January-to-February decline, Verisk Analytics (VRSK - Get Report) made lower lows in price, while also making slightly higher lows from the momentum indicator. This bullish divergence suggests that VRSK bounces soon.
Morgan Stanley: Verisk Analytics has "historically outperformed the S&P 500 during market corrections since 2010," analyst Toni Kaplan wrote. It has done the same "during nearly 90% of trailing four-week periods in which the S&P 500 declined by more than 5%, since the market peak in 2007."
Kaplan added that Verisk's resiliency is a "reflection of the high-quality, subscription-based (75% of revenue) business model that commands high free cash flow generation (~60% of EBITDA)."
Morgan Stanley: "We believe investors will value the counter-cyclical nature of WMT's business - should consumer confidence wane, middle-income shoppers could trade down to Walmart, which should help drive low-single digit comp growth and potentially offset increased wage/e-commerce expenses," analyst Simeon Gutman wrote.