Coca-Cola (KO), McDonald’s (MCD) and Nike (NKE) are some of the top picks among consumer stocks for Morgan Stanley, which reiterated its preference for defensive shares as the stock market heads into choppy waters in 2020.
Morgan Stanley drilled down on its top picks in the consumer space as it reiterated its view that the Standard & Poor’s 500 index could continue its bull run into early next year before the market focuses on fundamentals. That includes trade disputes and the upcoming US presidential election with a late-cycle economy in the backdrop. The investment firm is overweight on the defensive staples group while underweight consumer discretionary, which is a “typical” late-cycle underperformer, it said.
Beverages are an attractive industry as it has the strongest long-term pricing power with the consumer packaged goods group, said Morgan Stanley. For Coca-Cola, “we see clearly superior topline growth” against its peers in part because of its pricing power and momentum in emerging markets that Morgan Stanley said isn’t reflected in Coca-Cola’s current valuation. The soda maker is also at a growth inflection for per-share earnings after six years of a flat performance, the firm said.
McDonald’s, meanwhile, is poised for per-share earnings growth in fiscal 2021 and beyond, aided by technology investments, Morgan Stanley said.
“The stock is well positioned vs peers, in our view, on the back of digital and delivery sales growth, efficiency gains and recently completed refranchising that will likely lead to increased operating margin growth and MCD’s defensive profile in periods of market turmoil,” the firm said.
Morgan Stanley said Nike is “in the early innings” of transitioning from a traditional wholesale business to a digitally-driven, direct-to-consumer company. It expects the retailer to continue to place its newest launches and premium products directly to consumers, a move that leads Nike’s most profitable customers to that channel. Nike’s digital expansion is driven by Nike Plus members who spend three times more through the direct-to-consumer channel than non-members.
Morgan Stanley continues to prefer athletic-wear retailers over general apparel and footwear sellers “heading into both holiday 2019 and full year 2020 given sustained share gains.”