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Between the US-China trade war, political uncertainty, and a late-cycle economy, consumer businesses are navigating a challenging environment.
Morgan Stanley warned investors in a note Monday that these factors could lead to a compression in earnings for consumer stocks.
"Even if economic growth rebounds and continues at a modestly below-trend rate, we think rising costs and tight labor markets lead earnings growth to materially disappoint expectations over the next few months, creating elevated short-term downside risk," Morgan Stanley's analysts wrote.
The bank's analysts identified eight stocks in the consumer space they believe are best positioned to outperform their peers.
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Markets Insider calculated the implied upside of each stock using their closing prices on Monday and the price targets in the report.
Here are Morgan Stanley's top eight consumer stock picks:
"When combined with inflecting gross margins, which we expect to be above consensus based on our detailed GM build, we expect higher PG topline/EPS growth than peers, which should drive multiple expansion vs. inline relative valuations levels today," the firm wrote in a note to clients Monday.
"We believe MCD's Experience of the Future and technology investments are creating competitive moats in its business globally, supporting EPS and FCF growth in FY21 and beyond," Morgan Stanley's analysts wrote on Monday.
"Philip Morris (PM) is our top pick in Tobacco as we think it should generate peer-leading, HSD EPS growth driven by modest global cigarette volume declines, strong pricing due to a rational competitive and accelerating IQOS market share momentum," the firm wrote.
"The housing backdrop is improving and likely to be a tailwind in 2020 vs. a headwind in 2019, LOW is delivering healthier results and its transformation seems to be working, LOW appears to have greater relative momentum than HD into 2020," Morgan Stanley said.
"We view MDLZ's recent topline acceleration as sustainable, aided by successful strategic changes implemented by management, increased reinvestment, as well as a favorable geographic/category performance," the analysts wrote.
"We see clearly superior topline growth vs. large cap CPG peers, driven by stronger pricing power, strategy changes, ramping innovation, and momentum in emerging markets," Morgan Stanley said.
"PENN is our top pick in US gaming as it is arguably best positioned to benefit from the recent legalization of US sports betting given its 4 top class online partners and 19 state property footprint," the firm wrote.
"NKE is in the early innings of transition from a traditional wholesale business to a digitally-driven, direct-to-consumer ("DTC") brand. The business appears positioned to take share in the high-growth, global activewear market as well as increase profitability," the analysts said.
