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‘Stay defensively oriented in healthcare, staples, and utilities stocks’: Morgan Stanley suggests 3 names to buy

Don’t get fooled into thinking the stock market’s recent positive action has legs. Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson thinks it’s time to take profits “before the Bear returns in earnest.”

Wilson notes that his team’s tactical targets have been met and thinks the recent run-up has run its course. “Bear market rally runs into our original resistance levels--it's time to fade it,” says Wilson.

With the “risk-reward of playing for more upside quite poor at this point,” Wilson recommends investors “stay defensively oriented (Healthcare, Utilities, Staples).”

Meanwhile, Wilson’s analyst colleagues at Morgan Stanley have pointed out 3 stocks from these “defensively oriented” sectors, which should offer the portfolio some protection against incoming volatility. All have beaten the market in 2022, but the Morgan Stanley experts think investors should keep faith in them. We’ve opened the TipRanks database to see if there’s agreement regarding these names in the wider analyst community. Let’s check the results.

United Therapeutics (UTHR)

We'll start in the healthcare sector with United Therapeutics, a company focused mainly on developing and bringing to market drugs for pulmonary arterial hypertension (PAH). This name has done very well in 2022’s bear – up 27% year-to-date.

United Therapeutics has already established its credentials with the FDA having approved five of its medicines and are all responsible for generating revenues. The treprostinil-based products (Tyvaso, Remodulin, and Orenitram) are behind most of these, and going by the recent Q3 report, PAH treatment Tyvaso looks set to become the company’s first $1 billion annual run rate product as it clocked sales of $257.7 million in the quarter.

In total, the Q3 top-line haul showed $516 million, amounting to a 16% year-over-year increase and beating the Street’s call by $22.54 million. United is also profitable; EPS in Q3 reached $4.91, well above the $3.81 anticipated by the analysts.

On the back of a 2021 label expansion for Tyvaso for the treatment of patients with pulmonary hypertension associated with interstitial lung disease (PH-ILD), Morgan Stanley’s Terence Flynn notes the company’s growth is set to accelerate from 1% CAGR (compound annual growth rate) in 2018- 2021 to 10% CAGR in 2021-2024.

And looking ahead, Flynn sees "4 factors that will continue to drive growth: ongoing rollout of a new delivery device (DPI, approved in late May), Medicare coverage (went into effect on June 5), broadening the prescriber base, and expanding the drug's label to IPF (idiopathic pulmonary fibrosis).”

“UTHR also screens as undervalued relative to mid-cap peers,” adds Flynn, who gives an Overweight (i.e. Buy) rating on these shares, along with a $322 price target. Investors are looking at one-year gains of ~18%, should Flynn’s forecast go according to plan. (To watch Flynn’s track record, click here)

Most of Flynn’s colleagues agree; 7 other analysts join him in the bull-camp and with an additional 1 Hold and Sell, each, the stock makes do with a Moderate Buy consensus rating. (See UTHR stock forecast on TipRanks)

Hostess Brands, Inc. (TWNK)

We'll now take a turn into staples and hit the sweet spot with sugar rush powerhouse Hostess Brands. The company is a leading sweet snack specialist with its offerings including donuts, sweet rolls, snack cakes and pies, sweet baked goods, cookies, wafers, pastries and danishes — basically whatever your sweet tooth desires. These products are sold under an array of brands such as Hostess, Donettes, Twinkies, CupCakes, Dolly Madison, Voortman, Ding Dongs and Zingers, amongst others.

The packaged food segment might be a perennial underachiever, having regularly lagged the market over the past decade, but Hostess Brands investors will surely be pleased with this year’s performance. In contrast to the S&P 500’s -16% display, the stock is up by 23%, a return boosted by the metrics presented in the most recent financial statement – for Q3.

Hostess Brands' Q3 revenue climbed by 20% from the same period a year ago to $346.23 million while the company delivered EPS of $0.23. Both figures beat Street expectations. Even better, for the outlook, the company raised both its revenue and adjusted EPS guidance for the full year.

Evidently the company is navigating the tough economic terrain rather well, and not mincing her words when reviewing the company’s prospects, Morgan Stanley analyst Pamela Kaufman calls TWNK “our Top Pick in Packaged Food.”

“Q3 results demonstrate that TWNK's strong execution, driven by its innovation, marketing, and data analytics is positioning the company to deliver another year of double-digit topline growth following 11.6% growth last year,” the analyst explained. “We believe the company is positioned to sustain an attractive 2021-24 CAGR of 10.4% topline and 12.2% EPS supported by: i) attractive sweet baked goods category growth; ii) success around innovation (Baby Bundts Cakes, Boost, Bouncers) and marketing, including TWNK's first digital campaign; iii) solid growth across channels; and iv) Voortman upside potential from distribution growth and innovation.”

Underpinning these comments with an Overweight (i.e., Buy) rating and $30 price target, Kaufman sees the shares delivering returns of 19% over the next year. (To watch Kaufman’s track record, click here)

Most on the Street are thinking along the same lines; barring one skeptic, all 5 other reviews are positive, providing the stock with a Strong Buy consensus rating. (See TWNK stock forecast on TipRanks)

NextEra Energy (NEE)

Last amongst the Morgan Stanley-endorsed defensive stocks is electric utility play NextEra Energy, which happens to be the U.S.’s biggest renewable energy company by market cap.

This $169 billion behemoth provides electricity to millions of people in the US. Largest utility by market cap aside, subsidiary NextEra Energy Resources is also the biggest operator of wind and solar projects in the world. NextEra also produces electricity from other sources, primarily nuclear and natural gas.

The company’s footprint spans across vast swathes of the country (and parts of Canada too), although the bulk of operations are concentrated in three areas: Florida, California and the East Coast.

In its latest quarterly report, for 3Q22, NextEra generated revenue of $6.72 billion, a 54% year-over-year increase and trumping the analysts’ expectations by $950 million. Likewise on the bottom-line, adj. EPS came in at $0.85, above the $0.80 consensus estimate.

Further boosting its defensive credentials, the company also pays a dividend. The quarterly payout currently stands at $0.42, which annualizes to $1.68 and yields 2%. While that is below the sector average, the payout has been steadily increasing over the past few years.

Morgan Stanley analyst David Arcaro notes the solid Q3 showing and highlights the company’s excellent positioning.

“NEE reported strong 3Q results: Robust renewables backlog growth, likely earnings upside from IRA, and lower interest rate exposure than expected… NextEra is highly confident in executing against the 28-37 GW renewable development program in 2022-2025, an outlook that was set before the passage of the IRA. This project sets an EPS growth outlook of up to 8% through 2025, an already-attractive rate relative to the broader utility space and one we see as highly achievable,” Arcaro wrote.

To this end, Arcaro gives NextEra shares an Overweight (i.e. Buy) rating, while his $95 price target implies one-year share appreciation of ~12%. (To watch Arcaro’s track record, click here)

Wall Street is generally confident regarding NextEra’s prospects. The stock claims a Strong Buy consensus rating, based on 9 Buys vs. just one Hold. (See NEE 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 analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.