Meta Platforms headquarters in Menlo Park, Calif.
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The stock market has been volatile as the Federal Reserve looks to quickly tighten monetary policy. Stocks that provide stable cash flows and aren’t exorbitantly expensive should be good places for investors to hide out in if volatility remain high.
Strategists at Morgan Stanley screened for S&P 500 stocks such as Meta Platforms (ticker: FB) and Philip Morris International (PM) with reasonable valuations that shouldn’t be dented badly by less liquidity.
The S&P 500 is down about 2% from its all-time high, hit Friday. The index had reached that high after rebounding from a 4% decline in November, before this week’s drop.
The volatility comes straight from the Fed. The central bank was already reducing its monthly bond purchases by tens of billions of dollars, before it recently indicated that it could soon speed up that process. On Wednesday, the Fed will announce any changes to its policy—and another high inflation reading Tuesday isn’t helping calm investors’ nerves about tighter monetary policy.
Less liquidity circulating through markets means there is less capital available to bid for risky assets like stocks. Plus, the faster reduction in bond buying opens the door to potential short-term interest increases, which could dampen economic demand.
The Morgan Stanley stock screen identified stocks with forward price/earnings multiples that are in the 75th percentiles of their 10-year averages. The stocks also must have stable cash flows that don’t vary much–all stocks on the screen are in the top 50th percentile of earnings stability in their sector.
Here are five of the best examples on Morgan Stanley’s screen:
Meta Platforms, formerly known as Facebook, trades at 23.5 times the next 12 months of earnings per share projections, according to FactSet. That’s slightly below its five-year average of 23.9 times. To be sure, Meta Platforms could still see a big drop in its valuation when long-dated bond yields rise, which happens when the Fed buys fewer bonds. That’s because the company’s valuation is based on a long-term profit stream, and higher rates make future cash flows less valuable. But the Meta valuation has already fallen from its pandemic-era peak of 32 times as bond yields have risen.
Philip Morris trades at 14 times forward EPS, below its five-year average of 16 times. Northrop Grumman (NOC) trades at 15 times forward EPS, below its five-year average of 16 times. Cigna (C) trades at 9.6 times, below its average of 12 times. AbbVie (ABBV) trades at 9.1 times, below its average of 10 times.
All five stocks have sales and earnings that are barely influenced by changes in economic demand, hence the earnings stability.
Write to Jacob Sonenshine at [email protected]
