The Federal Reserve changed course last month, implementing its first interest rate hike in 3 years, and announcing the end of its long-standing policy of bond purchases – quantitative easing – going forward. The moves are a direct response to high inflation, a necessary shift when the inflation is running at 8.5% annualized.
In the meantime, markets are volatile. Stock and bond markets are fluctuating, and we’re starting to see short-term bond yields exceed the long-term. It’s definitely interesting times.
For investors seeking a clear path forward in this unclear environment, it’s worth checking in with the major investment banks, such as Wall Street giant Morgan Stanley. The firm’s analysts are always on the lookout for equities that are primed for success, no matter the macro conditions.
With this in mind, we’ve used the TipRanks database to pull up the details on two heavyweight stocks that the banking giant’s analysts have tapped. According to Morgan Stanley, their upside potential starts at 50% and goes up from there, and additionally, both are rated as Strong Buys by the analyst consensus. Let’s take a closer look.
Charles Schwab (SCHW)
The first stock we’ll look at, Charles Schwab, is one of the major banking firms in the US, making this pick, for Morgan Stanley, something of a busman’s holiday. Schwab is the largest publicly traded investment services firm in the US, and boasts some $7.6 trillion in client assets. Schwab is well-known for its role in bringing stock investment to the masses, acting as both an investment manager and a discount broker, and providing full service banking and investment services to more than 33 million client accounts in the US market and abroad.
Schwab’s stock has followed the market pattern this year, showing high volatility overlaid on a downward trend. Shares in SCHW are down 9% so far this year, and the recent quarterly results contributed to the latest downturn.
The company disappointed on both the top-and bottom-line in Q1; Revenue slid by 1.1% year-over-year to $4.67 billion, falling short of the $4.83 billion Wall Street had anticipated. Non-GAAP EPS of $0.77 came in below the consensus estimate of $0.84.
However, looking at Schwab following the disappointing performance, Morgan Stanley analyst Michael Cyprys calls the stock’s sell-off “overdone,” and highlights the positives. In fact, Cyprys says the stock’s weakness offers an even better opportunity than prior to the quarterly results.
“SCHW 1Q22 earnings came in below expectations with a miss on revenue and NIM, but with continued momentum and beats on net new assets, average interest earning assets and strong new account growth that demonstrate strength in the underlying business that should benefit from rising rates,” the analyst wrote. “SCHW’s rate sensitivity remains intact while underlying new asset and customer growth remains strong and thus see an even more attractive entry point relative to our call into the print where we designated SCHW our Top Pick.”
Cyprys’ comments back up his Overweight (i.e. Buy) rating on this stock, while his $132 price target implies an upside of 73% for the year ahead. (To watch Cyprys’ track record, click here)
Overall, the 13 recent analyst reviews on Schwab break down 10 to 3 in favor of Buys over Holds, for a Strong Buy consensus rating. The average price target of $101.04 indicates room for ~32% one-year upside potential from the current trading price of $76.45. (See SCHW stock forecast on TipRanks)
Delta Airlines (DAL)
The next Morgan Stanley pick is Delta Airlines, and as we all know, the airlines took a heavy hit during the corona crisis. While they rebounded when the economy reopened last year, they have not yet fully recovered. Delta shares are still down from their pre-pandemic level, although year-to-date, Delta’s shares are up 11%, reflecting an increase in travel as COVID is finally receding.
It’s not just Delta’s shares that are gaining in recent months. The company’s top line revenues dropped off the corona cliff in 2Q20, but steadily climbed from mid-2020 until the end of 2021. The most recent reported quarter, 1Q22, showed $9.35 billion at the top-line, more than double the 1Q21 result and coming in above the Street’s call by $360 million.
The airline still saw a net loss, however, of $1.23 per share in Q1. Yet, the loss was less than half the $3.55 loss reported in the year-ago quarter and beat the consensus estimate by $0.04. Delta had a solid liquidity position at the end of Q1; even after spending $1.6 billion of its operating cash flow on aircraft purchases and modifications, the company still had $197 million in free cash flow. This was part of $12.8 billion in total liquidity, which also included cash equivalents, short-term investments, and available credit.
All of this adds up, in the eyes of Morgan Stanley’s Ravi Shanker, to a solid opportunity. He writes, “March [was] the best cash sales month in DAL’s history (despite offering 10% fewer seats than pre-pandemic). We had glimpses of this strength in the mid-March updates when multiple airlines called out record travel days the week prior, but it is now clear that this momentum sustained into the end of the month and beyond.”
“Despite no shortage of black swan events, we remain bullish the US Airlines and DAL, in particular, because we believe the best is yet to come. The best mix is a head of us as corporate and international push toward normalization. Pent up demand continues to swell. The best operating leverage is ahead of us as capacity restoration outpaces resource addition and strong yields drop through to the bottom line,” the analyst added.
In line with this view of Delta’s underlying strength, Shanker rates the stock as Overweight (i.e. Buy), with a $65 price target implying a 12-month upside of ~50%. (To watch Shanker’s track record, click here)
Once again, Morgan Stanley takes a bullish stance without becoming an outlier. Delta has 15 recent analyst reviews, including 13 to Buy and 2 to Hold, giving the stock its Strong Buy consensus rating. The shares are priced at $43.54 and the average price target of $49.92 suggests upside of ~15% in the year ahead. (See DAL stock forecast on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
