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Morgan Stanley: 3 Surprising Stock Picks Ahead of Earnings

We are now heading into the thick of earnings season. Crucial reports coming up this week include Facebook (FB), Alphabet (GOOGL) and Amazon (AMZN). Encouragingly, 81% of companies that have reported so far have exceeded their bottom-line estimates, according to Credit Suisse.

However Morgan Stanley believes that guidance for 2H19 is too high. It expects companies to lower expectations for the second half of the year. So where does that leave investors? Luckily the firm has released a valuable report setting out its top picks this earnings season. What makes this report so unique is that the firm purposefully highlights stocks with a more bearish outlook from the rest of Wall Street.

“For each of these stocks, our analyst has a view that diverges from the Street’s, and expects a near-term event to drive the stock as the market’s view moves closer to ours,” the firm told investors.

Let’s take a closer look at 3 of these more controversial stock picks now:

Uber Technologies Inc (UBER)

Uber’s market debut was one of the biggest flops of recent years. Shares pulled back on the first day of trading from the IPO share price of $45 to just above $41. According to Renaissance Capital, the company succeeded in “having lost more cash than any IPO ever.” Even now the stock continues to hover at just $43 with shares falling 7% since the beginning of July.

Morgan Stanley cites investor concerns about ‘growth durability’ and the path to profitability as the reason for Uber’s poor stock performance to date. Indeed, UBER posted an eye-watering $1 billion net loss on revenue of $3.1 billion when it reported first quarter earnings back at the end of May.

However, the firm tells investors: “we like this set-up…particularly as we’re entering a 2H of easing Y/Y ride sharing growth compares, an (assumed) relatively stable competitive landscape in the US and abroad, and a still-long runway.” Indeed its analyst Brian Nowak currently has a buy rating on Uber with a price target of $56. From current levels that suggests upside potential of 27%.

He isn’t concerned about rival companies, noting that Uber's share of downloads dropped modestly in the UK following Bolt's launch, but has since recovered. “This, in our view, speaks to Uber's brand and market leadership even through new entrants" says the analyst.

And according to the firm, the “key to turning investor sentiment and interest” is Uber beating near-term expectations for ride-hailing bookings. That’s as the company’s last earnings revealed very strong growth for Uber Eats of 89%- but only 9% growth for its core ride-hailing department. Uber will report its earnings on August 8.

Gilead Sciences Inc (GILD)

Biopharma giant Gilead has so far only gained a paltry 4% year-to-date. That means the stock is primed to move higher if earnings top expectations when the company reports on July 30.

Ahead of the print, Morgan Stanley is confident that the company’s HIV franchise will help drive a second-quarter revenue beat. “We are also lower on 1H spending, which in combination with higher revenues would position GILD well for a 2Q19 EPS beat,” the firm said.

Indeed, Biktarvy's launch (+28% Q2/Q1) is the fastest HIV launch yet. The company’s 1Q earnings results revealed that Biktarvy generated $739MM (+34% Q/Q) in US revenue- in only its fourth full quarter on the market. “Biktarvy is the number one prescribed regimen for both treatment-naive and switch patients in the U.S; our consultants consider Biktarvy their "go-to" regimen” Cowen & Co’s Phil Nadeau revealed to investors recently.

Interestingly Morgan Stanley may not be the only outlier when it comes to Gilead stock. Five-star Wells Fargo analyst Jim Birchenough has just upgraded GILD from Hold to Buy. His $88 price target indicates shares can surge by 36%.

The analyst also singles out the company’s HIV offerings as behind his bullish call, writing: "We expect GILD earnings growth to reaccelerate beyond 2020 on continued HIV product growth and on incremental contribution from Galapagos-Partnership programs in fibrosis and inflammation.”

PG&E Corporation (PCG)

Natural gas stock PG&E may not seem like an obvious choice for Morgan Stanley. The company has had a tricky time recently- with shares currently trading down 22% since the beginning of July.

At the beginning of the year PG&E announced its intention to file for protection under chapter 11 of the Bankruptcy Code to address multi billion-dollar claims stemming from the deadly California wildfires of 2017 and 2018.

More recently the Wall Street Journal published a damning article claiming that PG&E knew for years that hundreds of miles of high-voltage power lines could fail and spark fires- but repeatedly failed to perform necessary upgrades. That allegation is now being investigated in the courts.

Nonetheless Morgan Stanley believes the stock could still outperform. That’s thanks to a hearing this week that will decide whether PG&E stakeholders have a say in the company’s restructuring plans. Right now the company has an exclusive right to file a reorganization plan until September. However according to Morgan Stanley a positive ruling for Pacific Gas at the July 23 hearing could remove a key overhang for shares.  

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