Recession fears increased last week after measures by the Federal Reserve and other central banks to tame inflation and the release of weak US economic data. Those concerns propelled the S&P 500 into a bear market, ending Friday’s session down 23.7% from its January high. The Dow Jones Industrial Average ended the week down 19.1% from its all-time high, just outside of a bear market. That said, Morgan Stanley has highlighted a few stocks that it believes are primed to weather this type of storm. Strategists at the bank searched the Russell 1000 index — excluding financials, real estate and utilities — for companies with strong balance sheets. Here are the criteria used for the screen: Cash as a percentage of enterprise value greater than 3% Greater than 5% free cash flow growth expected by analysts in each of the next two years Expected return on invested capital in each of the next two years Years of more than 10% Asset to liability multiplier of more than 1 Debt to equity ratio of less than 2.5 This screen only includes stocks with investment grade ratings and excludes names with negative equity. Check out 10 names that made the list: Micron made Morgan Stanley’s list with cash as a percentage of enterprise value at 12.2%. The chipmaker’s free cash flow is also expected to more than double next year and grow nearly 52% the following year. The company’s stock has struggled this year, falling about 40% in that time. However, UBS again named it a top pick last week, noting that company-specific and industry-specific factors should support its margins. “Given the macro concerns, we believe investors continue to overlook several key factors,” wrote analyst Tim Arcuri. “Although PC/Smartphone end-market weakness weighs somewhat on near-term DRAM ASPs, we see very strong price support going into 2023 as industry bit supply growth slows significantly.” United Therapeutics topped Morgan Stanley’s list with cash as a percentage of enterprise value at 24.9%. Analysts also expect double-digit free cash flow growth over the next two years, seeing a return on investment of 14.3% and 13.5% over those years. The biotech company’s shares have outperformed the market in 2022, posting a slight gain during that time. The stock is also up 20% over the past 12 months. Shoemaker Skechers also made it, with 8.5% cash as a percentage of enterprise value. The company’s free cash flow is expected to grow just 7.1% next year, but it’s expected to grow 72.5% the year after. The stock is down about 16% in 2022, outperforming the S&P 500. Argus Research upgraded it to “buy from hold” last week, noting that the company’s “supply chain initiatives and strong brand are likely to grow sales and profits over the next 2 years.” Also, the Google Parent company Alphabet is on the list, with cash accounting for 7.2% of enterprise value, and the company’s free cash flow is also projected to grow 13.4% and 17.7%, respectively, over the next two years Down 26% as investors largely dumped technology stocks amid rising interest rates Other stocks that made the list include: Arista Networks, Johnson & Johnson, Merck, Five Below, Jabil and Emerson Electric – Michael Bloom of CNBC contributed to this report.
https://www.cnbc.com/2022/06/19/these-fortress-balance-sheet-stocks-can-weather-a-recession-morgan-stanley-says.html These fortress balance sheet stocks can weather a recession, says Morgan Stanley