The most recent quarter marked the worst first quarter on record for both the S&P 500 and the Dow Jones. For investors in search of a bright spot, investing firm Morgan Stanley sees plenty of compelling opportunities being presented as a result of the market’s COVID-19-driven sell-off.
Morgan Stanley’s chief U.S. equity strategist Mike Wilson stated, “We like these prices a lot.” He added, “We’ve been scaling back into stocks over the last two, three or four weeks…We think this is probably the best risk-reward we’ve seen for investors in two years.”
Heeding Wilson’s advice, we used TipRanks’ database to take a closer look at stocks covered by Morgan Stanley’s analysts in the hope of finding some exciting plays to catch on recent weakness. It turns out that two of the firm’s recently upgraded picks have received significant support from other members of the Street, with the Buy-rated tickers also offering some impressive upside potential. That being said, one name stands out as being an investment to avoid, falling out of favor with Morgan Stanley as well as the broader analyst community. Let’s take a closer look.
Old Dominion Freight Line (ODFL)
Back in 1934, Old Dominion Freight Line opened up shop with only one truck running a 94-mile route in Virginia. Now, the company is one of the top LTL trucking players. Unlike the broader market, the last month has gone easy on this stock, with it down by only 1.6%, and Morgan Stanley is betting that substantial growth is on the horizon.
According to analyst Ravi Shanker, who covers the ticker for the firm, even though COVID-19 might make fundamentals worse before they get better, the risk/reward profile for the industry as a whole is becoming more stable. First and foremost, retail supply chains being stretched by consumers getting ready for lockdown has spurred an improvement in trucking data.
On top of this, Shanker stated, “While many parts of the manufacturing complex and other industries (airlines, hospitality) may be required to shut down completely in a national lockdown, the supply chains for consumer staples will likely continue to run, putting trucking, at least, toward the defensive end of industry exposure.” Once supply chains resume normal activity, freight transportation will be needed to restock, with this potentially causing tightness in supply and significant rate inflation.
Specifically explaining why ODFL represents an exciting play, the four-star analyst said, “We see ODFL as a best-in-class trucking asset and the most defensive company within Freight Transportation. This should protect the multiple better than at peers, in our view… We also note that ODFL arguably has more room to cut costs in a down cycle compared to other fixed cost businesses (like the Rails, for example) since their record margins in recent quarters have been driven by strong yields rather than cost cutting.”
As a result, Shanker upgraded the stock from Equal-weight to Overweight, but dropped the price target from $220 to $205. Should this target be met, a twelve-month gain of 56% could still be in store. (To watch Shanker’s track record, click here)
With 2 Buys and 6 Holds assigned in the last three months, the word on the Street is that ODFL is a Moderate Buy. Not to mention the $199.50 average price target brings the upside potential to 52%. (See Old Dominion stock analysis on TipRanks)
Virgin Galactic Holdings (SPCE)
Operating as part of the Virgin Group, Sir Richard Branson’s spaceline and vertically integrated aerospace company wants to expand access to outer space, developing and operating a new generation of space vehicles to achieve this goal. While some investors might see Virgin Galactic’s steep drop in the last month as a negative, Morgan Stanley argues the opposite.
Weighing in on the stock for the firm, analyst Adam Jonas wrote in a note to clients that the recent weakness doesn’t change his underlying bullish thesis. Acknowledging that the space tourism space could see a modest decline, he points out that the company maintains a “healthy” cash position, which lands around $500 million. He adds, “… its expected ~$16 million per month cash burn (MSe $180 million in 2020) positions it well to navigate any near-term headwinds.”
Going forward, Jonas notes management has stated that each step in the testing process is important and with each mission, continuous refinement, like fatigue dynamics and stress testing, of the spacecraft can be performed for reusability, quick turn-around, cost and safety. Expounding on this, the five-star analyst commented, “We expect this process of continuous refinement will ultimately be measured in years and will continue concurrently with the early commercial missions…”
Having said that, given the COVID-19-induced sell-off, there’s a risk that demand for luxury experiences will drop. However, Jonas argues, “All that being said, the company’s estimates conservatively assume an under penetrated high net worth (HNW) market (<0.1% of those with $10 million-plus net worth) and the space tourism capacity it expects to deliver has been expected to fall short of demand. Lastly, the story and mission remain unchanged, where the space tourism business serves to incubate the hypersonic P2P opportunity.”
With the share price reflecting a space tourism business delay and early credit for the hypersonic opportunity, Jonas joins the bulls, upgrading his call to Overweight. Even though he cut the price target to $24, this still leaves room for 62% growth to the upside. (To watch Jonas’ track record, click here)
Looking at the consensus breakdown, 2 Buys and 1 Hold issued in the last three months add up to a Moderate Buy consensus rating. At $29.67, the average price target implies shares could soar 101% in the next year. (See Virgin Galactic stock analysis on TipRanks)
Cognex Corporation (CGNX)
As for Cognex, Morgan Stanely is much less optimistic when it comes to the maker of advanced machine vision and industrial barcode reader systems, with shares taking a fall in the last month.
Writing for the firm, analyst Joshua Pokrzywinski acknowledges that the company has experienced multiple expansion over the last few years as a result of investors deeming the current year as a “trough”. However, he believes that the flattening of demand after the 2017 OLED boom and decline in automotive and consumer electronics markets has delayed a rebound by several years.
“Given meaningful weakness in automotive production and demand this year, we see another year of double-digit declines. Weaker consumer demand also weighs on our outlook for consumer electronics for CGNX, though multiple weak years softens the blow,” Pokrzywinski commented.
There is some good news. Pokrzywinski thinks Amazon’s COVID-19-driven throughput challenges could fuel significant growth for CGNX in the logistics market. However, he foresees “many other customers to defer spending as cash in traditional retail markets grows extremely tight in the short-term due to both lower consumer spending and the lack of brick-and-mortar foot traffic.”
Also concerning, the company saw negative operating leverage on 5% revenue growth in 2018 as well as a 97% decremental margin in 2019. “The company has a small, highly skilled employee base and we believe management will rightfully prioritize retention, but that it will drive a similarly high decremental margin in 2020,” Pokrzywinski explained.
In line with his pessimistic take, Pokrzywinski gave CGNX a thumbs down, downgrading the rating from Equal-weight to Underweight. The price target gets a haircut as well, to $36 from $42. The new target puts the downside potential at 15%. (To watch Pokrzywinski’s track record, click here)
Turning to the rest of the Street, other analysts take a cautious approach. Based on 1 Buy, 3 Holds and a single Sell published in the last three months, CGNX earns a Hold analyst consensus. In addition, the $44.25 average price target implies modest upside potential of 5%. (See Cognex stock analysis on TipRanks)