A strong U.S. dollar is good news for those who want to travel abroad. But for the stock market — which has already plummeted this year — it could lead to further downside according to Morgan Stanley.
“The recent move in the U.S. dollar creates an untenable situation for risk assets that historically has ended in a financial or economic crisis, or both,” Morgan Stanley analysts, led by Mike Wilson, write in a recent note to investors.
Wilson’s team calculates that every 1% gain in the U.S. Dollar Index would have a negative 0.5% impact on company profits.
Year to date, the U.S. Dollar Index has surged 16.5% while the S&P 500 has tumbled 23.8%.
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The analysts also point out that this greenback strength is happening at a time when central banks around the world are tightening monetary policy, and that does not bode well for the markets.
“If there was ever a time to be on the lookout for something to break, this would be it,” they write.
Wilson’s team expects the S&P 500 to fall to a level of 3,000 to 3,400 later this year or early next year. That implies a further downside of 7.6% to 18.5%.
But that doesn’t mean selling everything. Despite the gloomy outlook, Morgan Stanley still sees upside in quite a few companies. Here’s a look at three that it finds particularly attractive.
Eli Lilly (LLY)
This American pharmaceutical giant commands more than $300 billion in market cap, with products marketed in 120 countries around the world.
Despite the market downturn this year, Eli Lilly is not a beaten-down stock.
In the first six months of 2022, Eli Lilly’s revenue grew 6% year over year. Meanwhile, the company’s adjusted earnings per share improved 12% from a year ago.
Shares are actually up roughly 17% so far in 2022, and Morgan Stanley expects the trend to continue.
Analyst Terence Flynn has an ‘overweight’ rating on Eli Lilly and recently raised his price target from $395 to $412.
Considering that Eli Lilly shares trade at around $321 apiece right now, the new price target implies a potential upside of 28%.
Welltower is in the real estate business.
The company doesn’t own fancy shopping malls or posh office buildings. Instead, it focuses on health care infrastructure and provides real estate capital to senior housing operators, post-acute care providers, and health systems.
In Q2, Welltower’s revenue grew 29.1% year over year to $1.47 billion. Its same-store net operating income rose 8.7%.
Health care is a recession-resistant sector, so health care-anchored real estate is typically in high demand.
The company also benefits from a major demographic tailwind: population aging.
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Morgan Stanley analyst Ronald Kamdem notes that the population aged 75 and older is expected to grow by 4% annually through 2030, which could serve as a catalyst for Welltower’s business.
Kamdem has an ‘overweight’ rating on the company and a price target of $90 — implying a potential upside of 37%.
Exxon Mobil (XOM)
Thanks to strong oil prices, energy stocks have turned out to be some of the best performers of the S&P 500 so far this year.
Exxon Mobil, for instance, is up 44% year to date — and that’s after a strong rally in 2021.
The oil-producing giant gushes profits and cash flow in this commodity price environment. In the first six months of 2022, Exxon earned $23.3 billion in profits, a huge increase from the $7.4 billion in the year-ago period. Free cash flow totaled $27.7 billion for the first half, compared to $13.8 billion in the same period last year.
Solid financials allow the company to return cash to investors. Exxon pays quarterly dividends of 88 cents per share, translating to an annual yield of 3.8%.
Morgan Stanley analyst Devin McDermott has an ‘overweight’ rating on Exxon and recently raised his price target to $113 — roughly 23% above the current levels.
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