Morgan Stanley: 2 European Stocks to Overthrow the US Market Dominance


The last decade, since the financial crisis of 2008 and the subsequent Great Recession, have seen a heavy dominance of US companies in the global stock markets. American stocks have outperformed the international markets in all but two (2012, 2017) of the years since. Investment firm Morgan Stanley compared the records of the US S&P 500 with the MSCI All Country World Index (excluding the US), and noted that the American index has returned 500 basis points more, on average, than the international markets.

This trend could be at the initial stages of a reversal. According to Morgan Stanley’s chief investment strategist Lisa Shalett, “We see the relative outperformance of the S&P 500 versus the MSCI ACW ex US as reaching an inflection point.” She reached this conclusion after taking a closer look at the MSCI Europe returns in comparison to the S&P 500. Shalett’s market research shows that for much of the past year, the European index has outperformed the S&P.

Shalett takes the position that recent global economic disruptions – the general slowdowns, the bond yield inversion, and the fallout of the US-China trade dispute – have all been discounted in global stocks, while the relative immunity of the US economy has prevented American investors from ‘baking in’ the risks. In addition, the Federal Reserve raised rates four times in 2018, boosting the dollar against the Euro. It’s only in recent months that the Fed has begun lowering rates, and that US investors have begun to worry about the recession fears that bedeviled Europe for the last two years.

In Shalett’s view, as the global economic climate grows chancier, US stocks will start to falter – while European stocks, which have already seen their losses, will stand to gain as investors seek stronger buys. Shalett says, “The pay-off from this type of positioning could be large as non-US markets are … more operationally leveraged to improvements in global growth.” In other words, now may be the time to pick up European stock, while they’re relatively cheap.

We’ve used the TipRanks’ Best Stocks to Buy tool to find two European-based stocks with Strong Buy ratings and endorsed by Morgan Stanley in particular. Two pharmaceutical companies fit the bill.

Sanofi SA (SNY)

We’ll start with Paris-based Sanofi. This $100 billion-plus pharmaceutical giant is known for a wide range of drugs on the market, including a generic epinephrine injector, Glucophage for treatment of Type 2 diabetes, and the popular insomnia treatment Ambien. Over-the-counter offerings include Maalox, the well-known antacid, and Nasacort, a nasal spray used to treat allergy-related rhinitis. In addition to the company’s array of salable pharmaceuticals, Sanofi also has an active pipeline, with 83 projects total, including 35 in Phase 3 testing or submitted for regulatory approval.

Sanofi fits the Morgan Stanley profile described above, of a European stock that has baked in its recent weakness. SNY shares peaked two years ago, in October 2017, and while the share price started gaining in June of last year, it has had trouble gaining traction in the volatile market environment. That trouble has been restricted to share price, however – earnings have consistently beaten expectations since Q1 2018. The Q2 2019 report showed the widest margin, with a 10.4% beat.

The company’s revenue and profits are similarly robust. The 34.5 billion Euro (US$38.4 billion) recorded in 2018 was an increase from the year before, as was the 4.7 billion Euro (US$5.23 billion) in net profits. These strong numbers come along with a 13% gain since the stock’s most recent trough, on August 5 of this year. The healthy revenues, profits, and earnings have supported a strong dividend, with a 3.75% yield and a $1.72 annualized payout. The recent gains, along with the steady income performance through a period of lower share prices, suggest a company that has met and managed the risks of current market conditions and is ready for further gains, in line with Morgan Stanley’s general thesis above.

The firm’s 3-star analyst Mark Purcell agrees with that thesis, and upgraded his stance on SNY last month. He wrote to justify his Buy rating, “The company has the lowest risk growth outlook in European pharma given its lack of major patent cliffs and the largely de-risked nature of pipeline drugs in the late stages. We think Sanofi’s defensive qualities position it as a key holding in the current environment…” Purcell raised his price target by 14% to 90 Euro ($100), suggesting an impressive upside of 118%. (To watch Purcell’s track record, click here)

Purcell was not the only analyst to upgrade SNY recently. Guggenheim’s Seamus Fernandez also bumped the stock up to a Buy rating. Fernandez noted, “We believe that emerging markets growth should help stabilize the large established products and overall diabetes franchises and think that vaccines business growth looks sustainable.” His 96 Euro ($107) price target implies room for 133% growth to the stock.

SNY’s recent reviews include 4 buys – and nothing negative, giving this stock a Strong Buy on the consensus. Shares sell for $45.48, and the average price target of $52 suggests a 14% upside potential. (See Sanofi stock analysis on TipRanks)

GW Pharmaceuticals (GWPH)

GW is a unique. It’s a small-cap international pharmaceutical company, with a total market capitalization of just $3.8 billion, and it’s also an early adopter in the cannabis industry. Like many cannabis-related companies, GW’s earnings are upside down. Market analysts expect that this will change, now that GW has two drugs post-approval.

The company specializes in developing medical uses for the non-psychoactive CBD compound. The two new drugs it has derived from this are Sativex, an oral spray used to treat chronic pain and muscle spasticity in multiple sclerosis, and Epidiolex, an orally administered liquid solution for use in treating two rare forms of early-childhood epilepsy.

GW has high hopes for both drugs, and early indications are bearing those hopes out. Epidiolex has been on the US markets for two quarters now; in its second full quarter of sales, it was expected to reach $45 million and actually hit $68 million. It was a clear win for GW Pharma, and has helped to bolster the company’s prospects. Morgan Stanley used the sales beat to support a Buy rating and a 2% price target bump to $238.

Morgan Stanley analyst David Lebovitz noted that the strong Epidiolex sales indicated a FY2019 estimate for the drug of $291 million, a steep increase from the original forecast of $165 million. In an update note last month, Lebovitz added, “Mgt. announced that the European Commission (EC) has approved EPIDYOLEX® (spelled EPIDIOLEX in the US) for use as adjunctive therapy of seizures associated with Lennox Gastaut syndrome (LGS) or Dravet syndrome, for patients 2 years of age and older. The approval is as… The approval is valid in all 28 countries of the European Union.” Lebovitz’s $238 price target on GWPH indicates confidence in a 95% upside potential.

The analyst outlook on GWPH lines up with Lebovitz. Like SNY above, it is unanimous. GWPH has a Strong Buy consensus, based on 10 buy ratings set in the last three months. The stock’s $221 average price target suggests a robust 75% upside from the current trading price of $121. (See GW Pharmaceuticals stock analysis on TipRanks)

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