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28 Stocks to Buy Following Brexit - Morgan Stanley

June 27, 2016 12:24 PM EDT
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Price: $178.75 --0%

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Morgan Stanley released a list of stocks to buy following Brexit-related weakness. The firm said bottom-up analysis can reveal opportunities in stocks that may have been caught up in the sell-off despite limited exposure to the macro effects.

Below is the results of the firm asking US equity analysts to identify Overweight-rated stocks - especially those with limited downside to their bear case - whose fundamentals are unlikely to be materially negatively impacted by Brexit:

Acceleron Pharma (NASDAQ: XLRN) (Andrew Berens) – Acceleron is at a development stage with no near-term commercial exposure. We believe its fundamental value is driven primarily by clinical data, de-risking of pipeline assets, and the potential for strategic optionality. 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, a strong balance sheet, emerging wholly owned assets, and increasing prospects for strategic optionality. Celgene’s commitment to and validation of the ongoing Phase 3 programs allow us to view XLRN as a biotech growth story without the typical risk inherent in development-stage companies, with reduced financing risk. XLRN also has emerging wholly owned assets in attractive therapeutic areas (oncology and muscle) which are not currently reflected in most investor models, representing potential additional valuation upside as these programs advance.

Alexion (NASDAQ: ALXN) (Matthew Harrison) - We see the market's reaction to orphan drug companies’ exposure to Brexit as significantly greater than the potential fundamental impact from FX (ALXN -8.6% vs. -3% for major biotech on 6/24). While Alexion has ~32% of its business in the EU, we expect the top-line impact to be less than 1-1.5%. Thus, we believe ALXN could rebound as the market better digests the limited impact the company potentially faces.

Allergan (NYSE: AGN) (David Risinger) - We expect the impact of Brexit to be immaterial to Allergan's financial results. Only 1% of Allergan’s total revenue comes from the UK following the divestiture of the Actavis generics business to Teva. Additionally, we expect no impact to the Teva divestiture process as a result of the Brexit news.

Alphabet (NASDAQ: GOOGL) (Brian Nowak) – We believe GOOGL’s advertiser value proposition and competitive advantages remain unchanged with the voting results. GOOGL’s advertising products generate industry-leading ROI for advertisers and we believe this will continue to improve as GOOGL innovates and continues to optimize its advertising offerings (Customer Match, Expanded Text Ads, Maps, etc.). We expect GOOGL’s strong moat will allow it to continue to dominate in search advertising while investments in video content should drive longer-term monetization at YouTube, allowing GOOGL to continue to gain share of global ad budgets.

Amazon.com (NASDAQ: AMZN) (Brian Nowak) – The referendum result does not change our core AMZN thesis around improving profitability in the North American eCommerce business, which is driven in part by the growth of US Prime members (higher average basket size, more recurring orders). For perspective, AMZN has less than 10% exposure to the GBP (8% of revenue in 2015), and based on our AlphaWise survey data, we estimate only 3mn of AMZN’s ~50mn Prime subscribers (~6%) are in the UK. Further, AMZN’s cloud computing business, AWS, is another incremental growth and profitability driver (expected to grow topline 52% y/y in 2016 with 28% CSOI margins), and has relatively low exposure to the UK. All AWS clients are billed in USD, regardless of what country the client is located in, and AWS does not operate data centers in the UK so it has little to no GBP cost exposure. In all, Amazon’s accelerating revenue growth, expanding gross margins, and improving profitability leave us bullish on the core eCommerce business and AWS, even in a Brexit scenario.

Amgen (NASDAQ: AMGN) (Matthew Harrison) – We expect Amgen to outperform despite the concerns from Brexit. Amgen has less than 1% exposure to the British pound and ~15% of its business in the EU. We estimate the top-line impact from FX changes related to Brexit at less than 0.5%. Further, with its major EU distribution center based on the continent, there should be not impact to drug supply from Brexit. Thus, with a diversified product portfolio, major upcoming pipeline catalysts from PCSK9 outcomes, and a solid dividend (2.6% yield), we do not expect Brexit to have any impact on our fundamental view of Amgen.

Apple (NASDAQ: AAPL) (Katy Huberty) – We would expect the Brexit vote to be largely immaterial for Apple given the company has minimal exposure to the UK (we estimate mid-single digits). Apple is more closely tied to consumers globally and product replacement cycles, and therefore we see near-term weakness as a buying opportunity ahead of the September 2017 iPhone super cycle.

CBS (NYSE: CBS) (Benjamin Swinburne) –While CBS shares are driven largely by the company’s advertising exposure, this exposure is entirely in the US, and our work shows the US ad market looks quite strong right now.

Charter Communications (NASDAQ: CHTR) (Benjamin Swinburne) – Charter Communications is all US-based. 5% is ad-exposed while the rest is an ISP/cable subscription business. All its debt is US-denominated as well and not exposed to European/UK credit markets.

Cheniere Group (NYSE LNG) (Fotis Giannakoulis) – Cheniere is a US LNG producer that during the next 3 years is expected to bring online 7 liquefaction facilities (trains), 87% of whose capacity is already contracted under firm 20-year contracts without commodity exposure. These contracts alone account for ~60% of the current price and set our base case. The remaining 13% that are still available for sale are mainly affected by oil and gas prices and particularly the spread between US gas and international prices. In the event of a potential economic impact and lower oil demand driven by Brexit, crude supply growth appears to be in decline and oil futures suggest energy prices increasing. The company has fully financed all its capex and we believe it has no refinancing exposure until 2020, while all its debt comes from US funding.

ConAgra Foods (NYSE: CAG) (Matthew Grainger) – We would expect ConAgra to outperform as the stock should benefit from its almost entirely US-centric geographic profile, healthy dividend yield (2.1%), and opportunities to enhance fundamental results through incremental portfolio optimization and cost reduction efforts in its core Consumer Foods division. Additionally, the stock continues to offer a wide range of potential strategic catalysts, including the pending spin-off or potential sale of its Lamb Weston foodservice business, which should provide pathways for value creation independent of the current macro environment.

Concho Resources (NYSE: CXO) (Drew Venker) – We believe Concho is well-positioned for the current environment: it offers downside protection amid volatile macro near-term with its strong balance sheet and oil hedges, and has underappreciated leverage to oil longer-term, particularly with significant upside to growth expectations. CXO’s assets are 100% in the US; it has no direct earnings exposure to Europe.

Devon Energy (NYSE: DVN) (Evan Calio) – DVN fell ~7% on commodity weakness immediately after the Brexit news, despite no direct exposure to UK or EU (with the entirety of production and sales in North America). We expect positive changes to DVN’s risk/reward profile as it repairs its balance sheet via the Access pipeline sale (likely to be announced over the next several weeks). This should reduce DVN’s beta to potential crude weakness, while allowing it to capitalize on possible crude strength by supporting above-peer production and cash flow growth (we expect DVN to add rigs in 2H16). The likelihood of oil price weakness is overestimated by the market, in our view – UK is not a large consumer, and even the EU as a whole is not expected to materially contribute to demand growth. We acknowledge that stronger USD is a potential risk.

Facebook (NASDAQ: FB) (Brian Nowak) – We expect FB to outperform despite the referendum results as the core drivers of our Overweight thesis remain intact. We believe FB will continue to generate high and growing user engagement in addition to continued innovation in its advertising product offerings (carousel ads, dynamic product ads, online video, etc.). This should allow FB to capitalize on its long monetization runway and lead to strong ad revenue growth and continued market share gains, in our view.

Ferrari NV (NYSE: RACE) (Adam Jonas) – We believe RACE will continue to exhibit low volatility, with a 100% euro cost base and a high net export base outside the Eurozone (even adjusting for UK market exposure). The last cyclical downturn saw RACE volume fall only 4%.

IBM (NYSE: IBM) (Katy Huberty) – We would expect the Brexit vote to be largely immaterial for IBM given the company has minimal exposure to the UK (we estimate mid-single digits). IBM is more closely tied to enterprise spending than overall GDP; we are buyers of the stock on weakness and believe the transformation to a more analytics- and cloud-focused business is underappreciated.

Level 3 Communications (NASDAQ: LVLT) (Simon Flannery) – LVLT was off 6.4% on June 24, hitting a multi-month low. The recent twtelecom deal has significantly reduced Level 3’s exposure to the euro (2% of revenues) and British pound (4%). The company should generate more than $1 billion in free cash flow this year which could be used for M&A or buybacks. Their US business is seeing solid demand from enterprises reflecting secular growth in data traffic.

Lowe's (NYSE: LOW) (Simeon Gutman) – We expect LOW to outperform post the Brexit news as the business has zero UK/Europe exposure from revenue and currency perspectives. We believe the US housing and home improvement retail markets should be unaffected. Home improvement is one of our favorite Hardline/Broadline segments given housing tailwinds, strong household formation trends, oligopoly pricing, a limited internet threat, and a weak player in the segment donating market share. We continue to like LOW given its ability to convert sales into higher rates of profit, which should translate to segment-leading EPS growth.

Proofpoint (NASDAQ: PFPT) (Melissa Gorham) – PFPT offers a cloud-based email security solution—security generally ranks as the most defensive area of IT spending in our CIO surveys while PFPT has <20% exposure to markets outside the US, so its exposure to the UK/ GBP is modest. PFPT has a number of drivers which should sustain through CY16, including the move to the cloud, share gains, and benefits from recent tech partnerships.

ServiceMaster (NASDAQ: SERV) (Denny Galindo) – We expect ServiceMaster to outperform in a Brexit scenario as its revenue was stable in the last cycle, and as a levered company that is delevering it could benefit further from lower rates. We believe SERV will benefit from Zika concerns, warmer weather related to El Nino in the first half of 2016, and a potential upturn in termite activity (all unrelated to the macro cycle). Further, we expect a multiple rerating as investors better understand the three businesses and the acyclical nature of its cash flows. Roughly 1.5% of SERV revenue has international exposure, none in UK or Europe, and SERV looks attractive versus peers on a sum-of-the-parts basis. Terminix also provides termite and pest control services through subsidiaries in Canada, Mexico, the Caribbean, and Central America, as well as a joint venture in India.

Signature Bank (NASDAQ: SBNY) (Ken Zerbe) – We would be buyers of SBNY following the Brexit-related sell-off. Signature has no exposure to international markets, lending primarily to commercial real estate borrowers in New York City which, combined with commercial lending, accounts for 96% of its total loans. Moreover, it is slightly liability-sensitive, suggesting that the flattening of the Fed funds futures curve, and any expectation for fewer rate hikes, is far less of a headwind to SBNY than most other banks. We expect 28% and 20% loan growth in 2016E and 2017E (well above peers at 8.6% and 6.6%), and this should not change based on Brexit.

Starbucks (NASDAQ: SBUX) (John Glass) – We believe the dislocation associated with the Brexit vote presents an opportunity to own SBUX at a more compelling valuation (currently trading at 27x NTM EPS, versus its past 1-year and 3-year averages of 31x and 29x, respectively). As highlighted recently in our US Equity Strategy team’s report “The Brexit or Bremain Playbook” (June 20, 2016), SBUX does not have significant sensitivity to GBP, and we estimate ~3% of revenues are UK-based (versus ~6% total from Europe, and 62% from the US). Fundamentals remain sound (global SSS +6% in the quarter ended March; we forecast 5% SSS in F2017), and though there are some increased concerns about the overall retail environment, the combination of largely margin-accretive growth drivers from mobile order and pay/loyalty as well as the continued expansion of food and beverage offering, CPG acceleration, and international growth opportunities underpin our Overweight thesis.

Swift Transportation (NASDAQ: SWFT) (Ravi Shanker) – We see limited downside to earnings and share price for SWFT as a result of the vote for the following reasons: (1) Demand for SWFT’s services is driven by US consumer trends – SWFT has very little direct international/Europe exposure; (2) The company has very limited currency transaction risk (immaterial Mexican peso exposure); and (3) Intraday 6/24 price suggests the stock is trading at ~10x NTM P/E, which is one standard deviation below the historical average of 12.5x, reflecting low investor sentiment and helping to de-risk the stock from further de-rating, in the event of weaker US macro data. In addition, we continue to believe SWFT will be the biggest beneficiary of secular technology-driven efficiency savings and see 67% upside to the current stock price.

Synchrony Financial (NYSE: SYF) (Betsy Graseck) – SYF is a US private label credit card pure-play with no exposure outside the US. It is largely rates-neutral. The stock fell 5% on June 24; it had guided to loan losses and reserves increasing slightly at Morgan Stanley’s mid-June Financials conference, which spooked some investors who are concerned about a consumer credit cycle. The stock has declined 19% since our conference, and we believe that looks mispriced because the hit to EPS from their new guidance should be just 2-3%. We believe loan losses are only normalizing after a prolonged period of strong consumer credit; profit share with retailers is an important offset to higher loan losses (as loan losses go up, profit share with retailers goes down); the US consumer is still strong, and getting better, with lower unemployment, rising wages and lower gas prices, which should help loan growth and revenue; capital return is a key catalyst and we see upside to our conservative payout ratios of 55-60% in the medium term, given SYF's strong capital accretion and best-in-class capital ratio.

T-Mobile USA (NASDAQ: TMUS) (Simon Flannery) – TMUS was off 5.9% on 6/24. T-Mobile’s double-digit top-line growth is driven by share gain in the US wireless market (no international exposure) as the company continues to provide differentiated service offerings, most recently T-Mobile Tuesdays, and improving network quality. The company is expected to be free cash-flow-positive this year, and we expect clarity on Broadcast auction spending this fall.

Verisk Analytics (NASDAQ: VRSK) (Toni Kaplan) – We believe VRSK has a very high-quality business model (with 82% recurring revenue and the highest margins in our coverage), limited exposure to the Financial Services end market ex insurance (7%), and the vast majority of its revenue is from the Americas (85%) with only 10% exposure to EMEA. Additionally, VRSK has historically outperformed our Information Services coverage during downturns.

Workiva (NYSE: WK) (Stan Zlotsky) -- The US is now 94% of Workiva’s revenue, Canada is 3%, and Europe ~3%. It is a provider of software for submitting filings with the SEC, as well as SOX compliance and similar reporting for corporate boards and investors (in private companies). The stock was down 8% on 6/24, but fundamentals in a potential Europe recession should hold up very well.

Wynn Resorts (NASDAQ: WYNN) (Thomas Allen) – Wynn’s properties have very limited exposure to visitors from Europe and UK as it is a casino operator in Macau (0.8% visitation from Europe) and Las Vegas (estimate ~5% visitation from Europe). Wynn Resorts is expected to open a new casino in Macau in August, which we believe offers the potential for meaningful upside in terms of market share



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