US Equity Strategy: Monthly Strategy Guide - April

Transcription

MORGAN STANLEY RESEARCH
Adam S. Parker, Ph.D.
US Equity Strategy
The Market
The Themes
The Sector Bets
The Portfolio
Chief US Equity Strategist
[email protected]
+1 212 761-1755
www.morganstanley.com/equitystrategy
Brian T. Hayes, Ph.D.
[email protected]
+1 212 761-7991
Antonio Ortega
[email protected]
+1 212 761-4783
Phillip Neuhart
[email protected]
+1 212 761-8584
Yaye Aida Ba
[email protected]
+1 212 761-6537
Allison Rabkin Golden
[email protected]
+1 212 761-3023
For stock ideas or to decompose individual names, visit:
www.morganstanley.com/equitystrategy
Morgan Stanley does and seeks to do business with
companies covered in its research reports. As a result,
investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a
single factor in making their investment decision.
For analyst certification and other important
disclosures, refer to the Disclosure Section located
at the end of this report.
April 7, 2015
U.S. Equity Strategy
Outline
•
Part I: The Case for Expansion Until 2020 ……………………………….. 4
•
Part II: The Multiple, Earnings, and Margins ...………………………….. 14
•
Part III: Market Microstructure …………………………………………….. 21
•
Part IV: Sector Bets ………………………………………………………... 45
•
Part V: Arrows in the Quiver and the MOST Strategic Portfolio ………. 52
Adam S. Parker, Ph.D, (212) 761-1755, [email protected]
2
April 7, 2015
Four Charts You Can’t Miss
Historically, multiple expansion occurs with higher real rates.
Estimates have come down sharply for 2015.
Annual S&P500 Consensus EPS
As of April 2015
P/E Ratio vs. Real Long-Term Treasury Yield
Since 1930
$140
20x
2016E
2015E
$135
$135.61
18x
$130
16x
2014E
P/E Ratio
$125
$119.72
2013
14x
$120
12x
2012
$119.31
$115
10x
$110.67
$110
8x
$105
$103.21
$100
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13May-14 Oct-14 Mar-15
6x
4x
< 0%
0-1%
1-2%
2-3%
3-4%
4-5%
5-6%
> 6%
Real Long-Term Treasury Yield
We are overweight Energy and Discretionary.
Margin expansion potential differs by stock size.
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Staples
Industrials
Energy
(10%)
Utilities
E
(5%)
Overweights - Discretionary, Energy
Market-Weights - Materials, Health Care, Financials, Telecoms, Technology
Underweights - Utilities, Industrials, Staples
Technology
0%
Telecoms
5%
Health Care
Mega
Small
Materials
Large
Mid
Morgan Stanley Sector Recommendations
As of April 2015
Financials
10%
Top 1500: Net Margins by Market Capitalization,
Through 2016E
Discretionary
15%
5%
4%
3%
2%
1%
0%
(1%)
(2%)
(3%)
(4%)
(5%)
(6%)
Source: ClariFi, Thomson Reuters, Morgan Stanley Research
3
April 7, 2015
Part I: The Case for Expansion Until 2020
•
Economic Factors
•
Corporate Behaviors
•
Credit Cycle
4
April 7, 2015
Key Economic Growth Indicators Expanding While Consumer Confidence Is Only Average
Growth in Key Economic Indicators, % year-over-year
Consumer Confidence Index
10%
160
140
5%
120
100
0%
80
(5%)
60
40
(10%)
(15%)
Jul-09
Jul-10
Industrial production
Jobs
Real retail sales
Real income less transfers
Jul-11
Jul-12
Jul-13
Jul-14
20
0
67
72
77
82
87
92
97
02
07
12
5
April 7, 2015
Debt-to-Disposable Income Back Near Pre-Bubble Levels and Obligations Are Declining
Ratio of Payments to After-Tax Income
Ratio of Debt to Disposable Income
150%
18.5%
135%
18.0%
130%
17.5%
110%
108%
17.0%
16.5%
90%
16.0%
70%
15.5%
50%
1981
15.0%
1986
1992
1997
2003
2008
2014
82
86
90
94
98
02
06
10
14
6
April 7, 2015
75% of Household Balance Sheets Is in Mortgages and the Effective Yield Has Fallen
($bn)
Household Balance Sheet
16000
Effective Yield on All Outstanding Mortgages vs 30-Year Fixed-Rate
Mortgage Rate
12%
30-year FRM Rate
14000
10%
Home mortgages
12000
Effective Yield
8%
10000
Nonrevolving credit
6%
8000
Revolving credit
6000
4%
3.9%
4000
2%
2000
0%
0
82
86
90
94
98
02
06
10
14
90
94
98
02
06
10
14
7
April 7, 2015
Delinquencies Are at Multi-Year Lows and Low Risk of Recession Currently Indicated
Very Low Risk of Recession Currently Indicated by MSRISK
Percent of Balance 90+ Days Delinquent by Type of Loan
Recession
95% Threshold (lhs)
14%
MSRISK (lhs)
Volatility (rhs)
100%
12%
10%
500%
400%
75%
8%
300%
50%
6%
200%
4%
Credit Card
25%
100%
Mortgage
2%
Total
0%
0%
04
05
06
07
08
09
10
11
12
13
14
0%
61
66
71
76
81
86
91
96
01
06
11
Source: ClariFi, Thomson Reuters, Morgan Stanley Research. Note: The level of MSRISK must pass the 95% confidence threshold to signal recession has begun. Volatility in
the MSRISK must pass 300% to provide the 6-month lead-time for the start of recession.
8
April 7, 2015
Capital Spending Seems Constrained
Top 1500 Capital Spending-to-Sales
Through 2016E
Y/Y Growth in Capital Spending As of Q4 2014
12%
20%
15%
10%
10%
5%
0%
8%
2015E
6.7% 2016E
6.3%
6%
2015E
4.6%
(5%)
4%
Technology
Health Care
Utilities
Materials
Energy
Discretionary
Top 1500
Telecom
Staples
Industrials
(10%)
2%
Capex-to-Sales ex Energy
and Utilities
Capex-to-Sales
2016E
4.4%
0%
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
Source: Haver, ClariFi, Morgan Stanley Research
9
April 7, 2015
Inventory-to-Sales Is Contained in the US; Further Labor Productivity Is Likely
Top 1500 Inventory-to-Sales
Through Q4 2014
13%
Nonfarm Productivity: Quarterly Percent Change
4-Quarter Moving Average, Through Q4 2014
1.6%
1.4%
12%
1.2%
1.0%
11%
0.8%
0.6%
10%
0.4%
9%
0.2%
0.0%
8%
(0.2%)
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
03
05
07
09
11
13
Source: Haver, ClariFi, Thomson Reuters, Morgan Stanley Research
10
April 7, 2015
Debt Maturities Have Been Pushed Out and Interest Coverage Ratios Are High
S&P500
Loan Distribution by Year of Maturity
($Bn)
600.0
Top 1500 Interest Coverage
Through Q4 2014
10x
9x
500.0
8x
7x
400.0
6x
300.0
5x
4x
200.0
3x
2x
100.0
1x
0x
0.0
2015
2016
2017
2018
2019
2020
2021
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Source: ClariFi, Thomson Reuters, S&P LCD, Morgan Stanley Fixed Income Research, as of 12/26/2014 Note: Excludes Defaulted Facilities for observation period only
11
April 7, 2015
Debt Is Rising But Remains Low Relative to Equity
Top 500 Stocks (ex-Financials)
Net Debt ($ Billions)
Through 4Q 2014
2500
Top 1500 Net Debt-to-Equity
Through Q4 2014
110%
2300
100%
2100
90%
1900
1700
80%
1500
70%
1300
60%
1100
50%
900
89
91
93
95
97
99
01
03
05
07
09
11
13
40%
89
91
93
95
97
99
01
03
05
07
09
11
13
12
April 7, 2015
Is This Credit Cycle a Repeat of the 1990s? We Could See S&P Near 3000 by Cycle End
(bp)
1800
Historical High Yield Spreads
EPS vs SPX Level
2014 - 2020E
180
1600
1991-2002
2002-2008
2008-Current
1400
SPX Level: 3000
EPS
170
3000
SPX Level
1200
160
1000
150
800
140
600
130
400
120
3500
2500
2000
Repair
6% CAGR
200
Recovery
20
39
58
77
96
Months from Spread Peak
1000
500
110
Expansion
Downturn
0
1
1500
115
134
100
0
2014
2015
2016
2017
2018
2019
2020
13
April 7, 2015
Part II: The Multiple, Earnings, and Margins
•
S&P 500 Price Target
•
The Market Multiple
•
Earnings and Margins
14
April 7, 2015
Our Year-End 2015 Price Target Is 2275; We Are Above Consensus on EPS
Morgan Stanley 12-Month S&P 500 Price Target Methodology
EPS Landscape
Probability
of Scenario
Bull Case
Growth
Base Case
Growth
Bear Case
Growth
Expected Target
2015E
2016E
Multiple
Scenario
Target
132.1
11%
124.0
4%
111.9
(6%)
146.6
11%
131.0
6%
111.9
0%
18.8x
2750
33.0%
17.4x
2275
10.1%
15.2x
1700
(17.7%)
20%
60%
20%
Upside /
(Downside)
2255
2067
Current S&P 500 Price
Morgan Stanley and Consensus S&P 500 Earnings Estimates
As of March 2015
Consensus
MS Estimates
$119
$124
$119
2014
$120
2015E
Source: Thomson Reuters, Morgan Stanley Research
15
April 7, 2015
Multiples Are Above Average Levels – Multiple Expansion Occurs with Higher Real Rates
Top 500: Price-to-Forward Earnings
Through March 2015
P/E Ratio vs. Real Long-Term Treasury Yield
Since 1930
20x
35x
18x
30
25
20
Median = 13.8x
15
P/E Ratio
16x
14x
12x
10x
8x
6x
10
4x
< 0%
5
76 77 78 80 81 83 84 85 87 88 90 91 93 94 95 97 98 00 01 02 04 05 07 08 10 11 12 14
0-1%
1-2%
2-3%
3-4%
4-5%
5-6%
> 6%
Real Long-Term Treasury Yield
16
April 7, 2015
2015 Estimates Have Fallen Much More Sharply Than Average
Annual S&P500 Consensus EPS
As of March 2015
Consensus EPS Growth Forecasts
1976 - 2014
$140
16%
$135
14%
$130
2016E
2015E
$135.61
2014E
$125
$119.72
2013
12%
$120
2012
10%
$115
8%
$110
$119.31
$110.67
$105
6%
$103.21
$100
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13May-14 Oct-14 Mar-15
4%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
17
April 7, 2015
S&P 500 Growth Estimates
S&P 500 ex-Fin
S&P 500 ex-Fin & Energy
S&P 500 ex-Energy
Discretionary
Materials
Industrials
Technology
Tech ex-Apple
Utilities
Telecom
Health Care
Staples
Energy
EPS Growth
2014E
2015E
9.3%
(1.8%)
10.6%
6.8%
8.6%
7.4%
9.6%
11.5%
8.2%
(1.4%)
10.1%
11.6%
10.8%
5.6%
8.2%
2.1%
7.1%
2.1%
28.7%
5.9%
15.7%
8.9%
2.4%
0.2%
1.7%
(57.6%)
Revenue Growth
2014E
2015E
3.6%
(1.1%)
4.8%
4.2%
4.4%
4.0%
7.0%
4.4%
(1.0%)
(5.2%)
4.2%
5.4%
3.0%
4.1%
0.4%
1.5%
5.3%
(0.3%)
(3.5%)
4.9%
11.2%
10.4%
2.5%
1.3%
(2.2%)
(29.3%)
Source: Thomson Reuters, Morgan Stanley Research. Note: Bottom-up consensus estimates.
18
April 7, 2015
Companies Are Releasing Negative Guidance; We Expect Q1 EPS to Exceed Estimates
S&P 500 Quarterly Earnings Surprise (%)
Ratio of Negative-to-Positive At T=0
S&P 500 Guidance Relative to Consensus Expectations
20%
9
S&P 500
15%
T=0 is end of Quarter
S&P 500 Ex Fin
8.00
10%
8
5%
7
Average = 2.67
(Since 1Q05)
6
5.15
4.48
5
3.653.29
2.34 2.452.922.89 2.642.86
3
2.23
2.00
2 1.07 1.49 1.12 1.55
0.96
1
4
0%
(5%)
2.912.893.13
(10%)
(15%)
4Q14
2Q14
4Q13
2Q13
1Q15
4Q12
3Q14
2Q12
1Q14
4Q11
3Q13
2Q11
1Q13
4Q10
3Q12
2Q10
1Q12
4Q09
3Q11
2Q09
1Q11
4Q08
3Q10
2Q08
1Q10
4Q07
(20%)
0
19
April 7, 2015
Margins Have Expanded, Driven Primarily by Mega Caps
40%
Top 1500 Gross, EBIT, and Net Margin
Through 2016E
Gross Margin (LHS)
16%
35%
EBIT Margin (RHS)
14%
Net Margin (RHS)
30%
12%
25%
10%
20%
8%
15%
6%
10%
E
5%
4%
15%
10%
Through 2016E
Large
Mid
Mega
Small
5%
0%
E
(5%)
2%
0%
0%
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
(10%)
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
20
April 7, 2015
Part III: Market Microstructure
•
Market Dynamics
•
Style: Growth vs. Value
•
Substance: Quality vs. Junk
•
Size: Large vs. Small
•
Capital Use and Its Consequences
21
April 7, 2015
Hedge Funds in Aggregate Are Essentially Long the SPX; Alpha Generation Has Fallen
Correlation of HFRI Equity Hedge Index with S&P 500
(Rolling 60 Months), Jan 1990 - Feb 2015
1.0
0.8
Alpha
Correlation
0.9
0.7
0.6
0.5
0.4
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
(2%)
(4%)
Annualized Excess Return of HFRI Equity Hedge Index after
Equity Market, Size, Quality, and Style Factors (Rolling 60 Mos.)
Jan 1990 - Feb 2015
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
End of 60-Month Period
End of 60-Month Period
22
April 7, 2015
Optimize Your Ability to Pick Stocks on a Bottom-Up Basis!
Highly Idiosyncratic Industries Have Either Eclectic Stocks
or Unique Common Risk Factors, 60-Month Regression
Highest Industry Specific Risk
Industry
Wireless Telecommunication Services
Multi-Utilities
Electric Utilities
Airlines
Biotechnology
Gas Utilities
Real Estate Investment Trusts (REITs)
Food Products
Independent Power Producers & Energy Traders
Pharmaceuticals
Industries with Heavy Factor Exposure Tend to Come From
Sectors with Low Sector-Specific Risk, 60-Month Regression
Lowest Industry Specific Risk
Risk Percentage
Industry Specific
80.2%
72.3%
66.6%
64.8%
59.2%
53.3%
49.8%
49.7%
48.8%
48.6%
Industry
Machinery
Capital Markets
Chemicals
Electronic Equipment, Instruments & Components
Media
Auto Components
Insurance
Household Durables
IT Services
Containers & Packaging
Industry Specific
Risk Percentage
12.8%
13.3%
14.7%
15.4%
16.7%
17.5%
19.1%
19.7%
19.8%
20.0%
23
April 7, 2015
Stock-Specific Risk Is Near 5-Yr Highs; Alpha Generation in Tech, Retail Should Be High
Top 500: Stock Specific Risk, Rolling 252-Day
Through March 31, 2015
Best Factor Alpha & Performance Spread
Annualized, Since Dec. 1984
25%
90%
Alpha
80%
20%
Performance Spread
70%
15%
60%
50%
10%
40%
30%
5%
20%
05
07
09
11
13
Banks/Div.
Fin.
03
Insurance
01
Media
99
Industrials
97
Materials
95
Utilities
93
Staples
91
Autos/Dur.
89
Energy
87
Health
Care
85
Retailing
83
Tech
0%
10%
24
April 7, 2015
Equity Market and Hedge Fund Macro Variable Sensitivity
Equity Market Sensitivity to Macro Variables
April 1983 - August 2014
Macro Factor
Yield Curve Slope
Dollar Index
Baa Spread
Change in Factor
+1%
+6%
+1%
Exp. Market
Return
(4.3%)
(1.1%)
(4.0%)
Hedge Fund Macro Variable Sensitivity
Monthly Regression Coefficients: CS Indices Begin Jan. 1994;
HFRI Indices Begin Jan. 1990 Through August 2014
1.5
1.0
0.5
Spreads
0.09
Dollar
0.07
Oil
0.04
0.02
0.0
(0.5)
(0.01)
(0.04)
(0.06)
(1.0)
(1.5)
(0.09)
(0.11)
25
April 7, 2015
Energy Works Best in a Telegraphed Tightening Scenario
Telegraphed Rate Hike Scenario:
5/31/04-11/30/04
Scenario
Top 10
Bottom 10
Sectors/Cohorts
Energy
Information Technology
High Beta
Health Care
Materials
Junk
Low Beta
Value
Cyclicals
Small
Neither Growth/Value
Large Cap
High Quality
Utilities
Mega Cap
Neither Cyclicals/Defensives
Industrials
Mid Cap
Financials
Consumer Discretionary
Exp.
Return
10.45%
8.30%
7.49%
7.29%
7.07%
6.92%
6.81%
6.72%
6.66%
6.51%
5.91%
5.82%
5.55%
5.53%
5.52%
5.49%
5.45%
5.20%
4.02%
3.93%
Industries
Metals & Mining
Energy Equipment & Services
Oil, Gas & Consumable Fuels
Personal Products
Communications Equipment
Internet Software & Services
Biotechnology
Chemicals
Tobacco
IT Services
Household Durables
Electronic Equipment, Instruments & Components
Diversified Financial Services
Specialty Retail
Multiline Retail
Construction & Engineering
Air Freight & Logistics
Banks
Airlines
Thrifts & Mortgage Finance
Exp.
Return
18.49%
13.69%
11.35%
10.10%
9.28%
8.72%
8.42%
8.32%
8.13%
8.11%
3.91%
3.76%
3.63%
2.97%
2.84%
2.34%
1.97%
0.38%
0.23%
(2.84%)
Ticker
CSCO
ORCL
AAPL
MA
SLB
UNH
MON
COP
KO
MO
IBM
GE
C
GILD
INTC
AMGN
T
UPS
BRK.B
VZ
Company
Cisco Systems Inc
Oracle Corp
Apple Inc
Mastercard Inc
Schlumberger Ltd
Unitedhealth Group Inc
Monsanto Co
Conocophillips
Coca-Cola Co
Altria Group Inc
Intl Business Machines Corp
General Electric Co
Citigroup Inc
Gilead Sciences Inc
Intel Corp
Amgen Inc
AT&T Inc
United Parcel Service Inc
Berkshire Hathaway
Verizon Communications Inc
Exp.
Return
14.88%
14.05%
14.00%
13.07%
12.66%
12.31%
12.27%
10.67%
10.09%
9.48%
4.50%
4.50%
4.25%
4.13%
3.55%
3.46%
3.37%
3.30%
2.71%
2.67%
26
April 7, 2015
Growth Versus Value
•
Correlation Between Growth and Value Stocks Has Rolled Over From Prior Highs
•
Value Looks Expensive vs. History While Growth Is Less So
•
We Are Neutral on Style – A Barbell Strategy on Style
•
We Believe Investors Should Focus on Industries That are Cheaper Than the Market, But Which Are
Likely to Grow Faster Than the Market
27
April 7, 2015
Morgan Stanley Has Built a Proprietary Model for Identifying Growth and Value
Factors Considered for Growth Model
Variable
IBES Long-Term Growth Rate
EPS Growth Rate
EPS Growth Rel. to Estimate Dispersion
Breadth of EPS Revisions
Indicated Dividend Yield
Trailing Dividend Yield
Percent Change in Headcount
Return on Equity
% Change in Shares Outstanding
Sales Growth
R&D-to-Sales
Capital Spending-to-Depreciation
Price-to-Book
Tangible Price-to-Book
Cash Yield
Total Debt-to-Market Capitalization
Implication for
Growth Status
Positive
Positive
Positive
Positive
Negative
Negative
Positive
Positive
Negative
Positive
Positive
Positive
Negative
Negative
Negative
Negative
Factors Chosen for Growth Stock Model
Price-to-Book
Total Debt-to-Market Capitalization
Source: Morgan Stanley Research
28
April 7, 2015
Growth and Value Betas Are Similar, While Correlations Have Rolled Over
Growth vs. Value: 36-Month Rolling Correlation of Returns
Through March 2015
Beta of Growth/Value Relative to the Market
Through March 2015
1.0
Growth
1.5
0.9
Value
0.8
36-Month Correlation
1.3
1.1
0.9
0.7
0.5
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.3
76
79
82
85
88
91
94
97
00
03
06
09
12
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
29
April 7, 2015
Growth Outperformed Value for Most of 2014 and Revisions Have Turned Up Recently
Growth vs. Value: Relative Trailing 12-Month Performance:
Through March 2015
0.04
80%
0.03
0.02
Value Outperforms
20%
0%
(20%)
(40%)
(60%)
Growth Outperforms
Earnings Revisions
12-Month Relative Return
60%
40%
Growth and Value Revisions Trends
3-Month Moving Average
Through March 2015
0.01
0.00
(0.01)
(0.02)
(0.03)
(0.04)
(0.05)
(80%)
Growth - Market
Value - Market
(0.06)
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
30
April 7, 2015
We Have Built a Proprietary Model for Identifying High / Low Quality U.S. Stocks
Measures of Intrinsic Stock Quality Used in the MS Quality Model
Included In Final Model
Equity Market beta
Negative - Quality Stocks Have Lower betas
Market Cap (logarithm)
Positive - Quality Stocks Are larger
T Statistic of EPS
Positive - Quality Stocks Have More Stable EPS
T-statistic of Dividends/Share
Positive - Quality Stocks Have Stable Dividends
T-stat of { Dividends/Share Growth Rate }
Positive - Quality Stocks Grow Their Divs/Share
"Ever Paid a Dividend" Flag
Positive - Paying a Dividend Associated with Quality
T-statistic of ROE
Positive - Quality Stocks Have More Stable ROE
Daily Share-Base Turnover
Negative - Quality Stocks Have Stable Investor bases
Volatility of ROE
T-statistic of ROE Growth Rate
Sales Growth (1 yr) (%)
Net Margin
Net Cash Ratio Volatility
ROE
Total Debt / Market Cap
Trailing Dividend Yield
T-statistic of EPS Growth Rate
Other Factors Tested
Negative - Quality Stocks Have Less Volatile ROE
Negative - Quality Stocks Already Have High ROE
Positive - Quality Stocks Have Grown sales
Negative - Quality Stocks Have Less Growth potential
Positive - Quality Stocks Have Higher Net Margins
Negative - Stable Net Cash Ratios Associated with Quality
Positive - High ROE Associated with Quality
Negative - High Debt Loads Not Associated with Quality
Positive - Higher Dividend Yield Associated with Quality
Positive - Higher Dividend Yield Associated with Quality
Positive - Quality Stocks Have Growing EPS
31
April 7, 2015
“Moderate” Quality Has Been the Long-Term Winner
Cumulative Performance of Beta-Hedged Quality Quartiles
Through Mar 2015
Residuals of the Junk-Quality Spread
Mar 2014 - Mar 2015
300%
Cumulative Return of Monthly Returns
3.0%
Junk Stocks
Outperform
2.0%
1.0%
0.0%
(1.0%)
(2.0%)
(3.0%)
(4.0%)
(5.0%)
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
250%
200%
Q1
Q2
Q3
150%
Q4
100%
50%
0%
(50%)
(100%)
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
32
April 7, 2015
Large vs. Small
•
Mega-Caps Have Record Margins While Small-Cap Profitability Is Modestly Below its Long-term Average
•
Despite Small-Caps Being Somewhat Expensive vs. Mega-Caps, the Group Has Similar Dividend Yields
•
Small-Caps Offer Higher Sales Growth versus Mega-Caps
•
Recent Deal Activity Is also Near All-time Lows, Providing Upside Should Management Confidence Grow
•
There Are High Quality Small Cap Companies
33
April 7, 2015
Small-Cap Stocks Outperformed in March
Return Residuals by Market Cap
Through March 2015
6.0%
4.0%
2.0%
Mega
Large
Mid
Small
0.0%
(2.0%)
(4.0%)
(6.0%)
Last Month
Last 3 Months
Last 6 Months
Last 12 Months
34
April 7, 2015
Magnitude of Future Small-Cap Margin Expansion and Faster Growth Are Positives
15%
10%
Top 1500 Sales Growth: Mega vs. Small Caps
1974 Through Q4 2014
Through 2016E
35%
Large
Mega
30%
Mid
Small
25%
Mega
Small
20%
15%
5%
10%
5%
0%
E
(5%)
0%
(5%)
(10%)
(15%)
(10%)
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16
(20%)
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
35
April 7, 2015
Reward for Buybacks Varies By Size of Company; An Improving Small-Cap M&A Cycle
Would Be Beneficial
Efficacy of Buybacks by Market Cap
Last 12 Months
Small Cap Offer Intensity
Q4 1983 - Q4 2014
5%
2%
Small, Mid, & Large
(1%)
Share Issuance
Rewarded
Mega
1%
# offers/# stocks
Share Buybacks Rewarded
4%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
36
April 7, 2015
Historically, Generating Alpha among Mega-Caps Was Feasible; Blended $100 Billion
Stock Ranking Likes BAC the Most, XOM the Least
Spread in Annual Returns
14%
Mega-Caps: 75%-ile to 25%-ile Return Spread for Simulated
Portfolios with a Basic Weighting Scheme
1964 to 2014
12%
10%
8%
6%
4%
2%
0%
64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12
Weight
BAC
GILD
IBM
JPM
CVX
BMY
DIS
XOM
MS Analyst View
less WITP
Value
Rank
15%
3
8%
8%
2
8%
1
8%
3
(5%)
41
(3%)
36
(3%)
35
(2%)
34
MS vs Cons.
3-Year EPS CAGR
Rank
Value
20%
3%
4
8
1%
(1%)
25
0%
17
6%
2
2%
7
35
(3%)
(8%)
41
Forecasted Total
Return
Value
Rank
20%
29%
2
14%
10
11
14%
10%
21
2%
39
7%
35
9%
27
2%
38
Quant
Model
Rank
Value
25%
9.6%
7
2
25.7%
27.2%
1
15.0%
6
(17.4%)
37
38
(17.6%)
(13.7%)
36
34
(12.8%)
"Quantamental"
Approach
Value
Rank
20%
8.3
2
6.5
1
17.0
12
9.5
3
26.0
29
29.5
38
28.0
37
33.0
41
Blended
Rank
3.8
4.6
10.0
10.2
29.4
30.9
34.1
37.6
Source: ClariFi, Thomson Reuters, Morgan Stanley Research. For important disclosures regarding companies that are the subject of this screen, please see the Morgan Stanley
Research Disclosure Website at www.morganstanley.com/researchdisclosures.
37
April 7, 2015
Capital Use and Its Consequences
•
Enormous Cash Balances Exist
•
ALERT: The Acquisition Likelihood Estimate Ranking Tool
Conclusion: We See M&A and Dividend Growth as Likely
38
April 7, 2015
US Corporate Balance Sheets Hold $1.7 Trillion in Cash
Share of Cash Balances by Sector (Ex-Financials)
As of Q4 2014
40%
30%
$1.2
25%
$1.0
20%
$0.8
15%
18%
17%
13%
10%
$0.6
7%
6%
6%
Energy
$1.4
34%
Other
35%
Staples
$1.6
5%
$0.4
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Discretionary
$0.0
Industrials
0%
$0.2
Health Care
$1.8
Cash Balances
Top 1500 Stocks (Ex-Financials, $T)
Through Q4 2014
Technology
$2.0
39
April 7, 2015
Investors Rewarded Dividends Last Year
Efficacy of Capital Uses by Time Period: One-Year Return
Top vs. Bottom Tertile (T1-T3), 1969 - February 2015
Capital Spending
19691976
0.3%
19771994
(3.4%)
19952001
(6.4%)
20022008
1.1%
20112014
(7.2%)
R&D Expenditures
9.4%
1.2%
7.1%
(2.6%)
3.1%
(7.9%)
(5.8%)
(13.8%)
(9.0%)
2.3%
2.8%
(1.6%)
1.4%
(2.5%)
(3.0%)
(9.5%)
(1.6%)
Internal Growth
External Growth
Reduce Leverage
Return to
Shareholders
M&A
Cash Only
Stock Only
Blend
Change in Debt-toAssets
2.1%
(0.1%)
(1.1%)
2.3%
(0.2%)
Total Yield
Dividend Yield
Share Buybacks
(3.1%)
(3.1%)
(0.2%)
1.3%
0.6%
2.9%
2.4%
0.1%
10.2%
(1.0%)
0.6%
(1.7%)
5.5%
2.0%
5.8%
Source: ClariFi, Thomson Reuters, Morgan Stanley Research Note: T1 defined as high capital spenders, high R&D spenders, high shareholder yield, low change in total debt.
For M&A the figures represent median performance of acquirers vs the market.
40
April 7, 2015
Dividend Yield Is Rewarded Episodically; Buybacks Have Been Effective Long Term
Dividend Yield
12-Month Long/Short (Q1-Q5) Return Spread
Through March 2015
100%
60%
40%
Dividend Yield Rewarded
20%
0%
(20%)
(40%)
(60%)
(80%)
Dividend Yield Punished
12-Month return spread (Q1-Q5)
12-Month return spread (Q1-Q5)
80%
Reduction in Shares Outstanding
12-Month Long/Short (Q1-Q5) Return Spread,
Through March 2015
80%
60%
Buybacks Rewarded
40%
20%
0%
(20%)
Buybacks Punished
(40%)
(60%)
(100%)
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Source: ClariFi, Thomson Reuters, Morgan Stanley Research Note: T1 defined as high capital spenders, high R&D spenders, high shareholder yield, low change in total debt.
For M&A the figures represent median performance of acquirers vs the market.
41
April 7, 2015
US Companies Switched More to Buybacks from Dividends Relative to Long-Term
History; But C-Level Execs Are Paid More in Restricted Stock
Top 500: Total Yield, Dividend Yield, and Buyback Yield
Through March 2015
7%
9%
Dividend Yield (LHA)
6%
5%
Buyback Yield (LHA)
Total Yield (RHA)
100%
8%
90%
7%
80%
6%
70%
4%
5%
3%
4%
Percentage of CEOs from S&P 500 Companies
Receiving Equity-Based Compensation
1992 Through 2011
60%
50%
2%
1%
40%
3%
30%
2%
20%
CEOs with Option Grants
10%
CEOs with Restricted Stock Grants
1%
0%
0%
0%
64 67 70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Morgan Stanley Research, Murphy, Kevin J., “Executive Compensation: Where We Are, and How We Got There,” Handbook of the Economics of Finance, December 19, 2012.
42
April 7, 2015
Our Acquisition Likelihood Estimate Ranking Tool, ALERT, Contains 10 Factors
ALERT
Factor
Size Deal Intensity (Annual)
Quality Deal Intensity (Annual)
Sector Deal Intensity (Annual)
Health Care Indicator
Sector Relative Price-to-Book
Dividend Yield
Debt-to-Assets
Market Cap Rank
Mega-Cap Cohort Indicator
Industrials Indicator
Interpretation
Higher Means More Likely Offer
If Health Care Means More Likely Offer
Cheaper Means More Likely Offer
Lower Means More Likely Offer
Smaller Cap Means More Likely Offer
If Mega-Cap Means Less Likely Offer
If Industrial Means Less Likely Offer
Parameter
Sign
+
+
+
+
+
+
-
43
April 7, 2015
Large Stocks with the Highest Likelihoods of Receiving Offers according to ALERT
Liquid Stocks from Each Sector that Are in the
Top Quintile of ALERT as of January 2015
Ticker
RDC
DNR
PTEN
RKT
MLM
RGLD
GPK
LMCA
CVC
LAMR
NVR
BC
DNKN
AMCX
SBH
GNC
CAB
RAD
INGR
WWAV
HAIN
SFM
AVP
HLF
NUS
Company Name
Rowan Companies Plc
Denbury Resources Inc
Patterson-Uti Energy Inc
Rock-Tenn Co
Martin Marietta Materials
Royal Gold Inc
Graphic Packaging Holding Co
Liberty Media Corp
Cablevision Sys Corp -Cl A
Lamar Advertising Co -Cl A
Nvr Inc
Brunswick Corp
Dunkin' Brands Group Inc
Amc Networks Inc
Sally Beauty Holdings Inc
Gnc Holdings Inc
Cabelas Inc
Rite Aid Corp
Ingredion Inc
Whitewave Foods Co
Hain Celestial Group Inc
Sprouts Farmers Market
Avon Products
Herbalife Ltd
Nu Skin Enterprises -Cl A
Mkt. Cap
($B)
Price ($)
2.8
18.07
2.4
7.84
19.37
2.3
63.08
8.9
7.4
137.36
64.69
4.9
14.55
4.7
11.9
39.48
5.4
18.16
5.3
59.58
5.3
1,353.13
51.34
4.8
4.7
47.32
4.6
75.33
34.40
4.6
4.1
48.01
4.0
57.12
8.79
7.2
6.2
78.65
5.8
44.65
5.4
63.86
5.3
35.80
7.97
3.3
2.8
42.91
2.6
61.12
Sector
Energy
Energy
Energy
Materials
Materials
Materials
Materials
Consumer Staples
Consumer Staples
Consumer Staples
Consumer Staples
Consumer Staples
Consumer Staples
Consumer Staples
Consumer Staples
Combined
Rank
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Ticker
DVA
EW
BCR
INCY
MNK
HSP
JAZZ
DGX
ALKS
AHL
DST
FEIC
JDSU
LXK
ZNGA
LVLT
FTR
WIN
TE
GXP
STR
Company Name
Davita Healthcare Partners
Edwards Lifesciences Corp
Bard (C.R.) Inc
Incyte Corp
Mallinckrodt Plc
Hospira Inc
Jazz Pharmaceuticals Plc
Quest Diagnostics Inc
Alkermes Plc
Aspen Insurance Holdings Ltd
Dst Systems Inc
Fei Co
Jds Uniphase Corp
Lexmark Intl Inc -Cl A
Zynga Inc
Level 3 Communications Inc
Frontier Communications Corp
Windstream Holdings Inc
Teco Energy Inc
Great Plains Energy Inc
Questar Corp
Mkt. Cap
($B)
Price ($)
16.3
80.59
13.8
140.61
13.2
167.93
13.1
88.79
12.2
124.76
10.8
87.82
10.6
168.86
75.80
10.1
10.0
60.10
2.7
47.57
3.7
111.57
3.3
78.26
3.1
12.98
2.4
42.92
2.3
2.78
11.8
54.23
6.8
7.32
5.0
7.92
5.0
19.64
4.6
26.95
4.6
24.00
Sector
Health Care
Health Care
Health Care
Health Care
Health Care
Health Care
Health Care
Health Care
Health Care
Financials
Telecommunication Services
Utilities
Utilities
Utilities
Combined
Rank
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Note: ALERT rankings are based on a weighted combination of 10 factors. MOST, BEST, and analyst ratings are not included in these factors. Model rankings are updated based on current
valuations. Note that this is a purely quantitative model and it makes no adjustment for other qualitative factors that will often be key considerations for any acquisition. While stocks that are
ranked highly according to this model have historically had elevated probabilities of receiving offers, it is still unlikely that any individual name from this rankings list will receive an offer over
the next 12 months. For important disclosures regarding the companies that are the subject of this screen, please see the Morgan Stanley Research Disclosure Website at
www.morganstanley.com/researchdisclosures. Prices updated as of 04/02/2015. Source: ClariFi, Thomson Reuters, Morgan Stanley Research.
44
April 7, 2015
Part IV: Sector Bets
•
Sector Recommendations
– Overweights: Discretionary, Energy
– Market-Weights: Materials, Health Care, Financials, Telecoms, Technology
– Underweights: Utilities, Industrials, Staples
•
Industry Selection Model: PRISM
45
April 7, 2015
We Are OW Discretionary and Energy, UW Utilities, Industrials, and Staples
2.3%
Energy
Staples
Industrials
Discretionary
Health Care
Financials
Technology
0%
Overweights - Discretionary, Energy
Market-Weights - Materials, Health Care, Financials, Telecoms, Technology
Underweights - Utilities, Industrials, Staples
Staples
3.1%
Industrials
3.2%
Utilities
5%
Technology
8.1%
Telecom
9.8%
Utilities
10.3%
10%
Telecoms
12.6%
Health Care
14.7%
Materials
16.2%
15%
Financials
19.7%
Materials
20%
Morgan Stanley Sector Recommendations
As of April 2015
Discretionary
25%
5%
4%
3%
2%
1%
0%
(1%)
(2%)
(3%)
(4%)
(5%)
(6%)
Energy
S&P 500 Sector Weights
As of April 2015
Source: Capital IQ, Thomson Reuters, Morgan Stanley Research
46
April 7, 2015
Overweight Rated Sectors
•
Energy:
–
–
–
•
We Are Retaining Our Energy Position of 12% vs the Benchmark Weight of 8.1%
Energy Earnings Revisions Will Assuredly Be the Most Negative of Any Sector in the Market, But This Doesn’t Always Mean the
Sector Underperforms-- There’s Ample Precedent For Energy Stocks to Work With Negative Earnings Revisions
But We Do Worry Our Upgrade Could Be Premature if Oil Falls to Cash Cost
Consumer Discretionary:
–
–
We Retain Our 16% Large Overweight Position vs. the Benchmark Weight of 12.7%
We Like the Fact that the Low End Consumer Benefits From Lower Fuel at the Pump, But Many Low End Consumer Stocks Have
Been Quickly Re-Rated Higher, So Our Bets Now Are More On Brands
47
April 7, 2015
Market-Weight Rated Sectors
•
Financials:
–
–
–
•
Materials:
–
–
•
–
–
After Recommending Health Care for the Last Four Years, We Reduced Our 2015 Outlook Based on a More Balanced Risk-Reward
We Still Prefer Health Care to Staples, But Health Care Price-to-Forward Earnings Has Expanded to Ten Year Highs and We Are
Concerned About Drug Price Inflation and its Impact on the Distribution Industry
We Hold 15% of Our Portfolio in Healthcare vs. the S&P 500 Benchmark Weight of 14.8%
Telecommunications:
–
•
Sector Is Only 3.2% of the S&P 500 and Is Weighted About 2/3rd Toward Chemicals
We Have 4% Exposure in Our Portfolio. The Majority of Our Picks Are in Chemicals
Health Care:
–
•
We Hold 18% vs. the Benchmark Weight of 16.3%
During Our Mid-Year Outlook We Were Cautious on Financials as We Were Worried about Fundamental Trends, But the Sector Has
Modestly Outperformed the S&P 500 Since Then, Despite the Less Favorable Rate Environment
We Are Constructive On the Duration of the Cycle but Continue to Prefer Retailers to Banks
Our Only Telecom Holding is a 2% Position in VZ vs the 2.3% Benchmark Weight
Technology:
–
–
–
–
We Hold a 19% Weight in Technology vs the Sector Benchmark of 19.6%
It Has Been Difficult to Implement a Quantamental Investment Discipline and We Have Moved Outside the Discipline to Find Ideas
Sector Looks Attractive in Aggregate on Valuation, Cash Flows, and Cash Balances, But Few Individual Securities Embody the Attributes of
the Whole
Select Industries Are Among the Fastest Growing in the Market, and Fast Growing Stocks that are Cheap Typically Underperform Fast
Growing Stocks that Are Expensive
48
April 7, 2015
Underweight Rated Sectors
•
Utilities:
–
–
•
Industrials:
–
–
–
•
We Hold 1% of the Portfolio in Utilities vs the Benchmark Weight of 3.1%
We Remain Underweight the Sector Even As Utilities Have Underperformed the Market Recently
We Haven’t Been Recommending Industrials For a Year and hold 8% vs the Benchmark Weight of 10.3%
We Have Negative Bias toward the Sector Given our View that Capital Spending Will Disappoint
However, Industrials Generally Screen Well on at Least One of Our Models (MOST and BEST, but Not Both) and We Want to Retain
Some Exposure to China
Consumer Staples:
–
–
–
We Remain Underweight Staples: The Sector Is 5% of the Portfolio vs. the Benchmark Weight of 9.8%
We Remain Broadly Concerned about Valuation and Estimate Achievability for this Group
Our Biggest Positions in Staples Are WWAV and SFM
49
April 7, 2015
Margins Matter For Tech While Forecasted Revenue Growth Does Not Appear
Correlated to EV-to-EBITDA Multiples; Tech Returns More Cash to Shareholders
Tech Stock Performance: Improving Margins vs Sales Growth
Through Q4 2014
Top 50 Tech: NTM Forecast Revenue Growth Vs Multiple
200
20%
150
15%
100
EV-to-EBITDA
Cumulative 1-Month Relative Return
25%
10%
5%
50
-
(50)
0%
(100)
(5%)
12/09
12/10
12/11
12/12
12/13
12/14
(150)
(10%)
0%
10%
20%
Forecast Revenue Growth
30%
40%
Top 500 Technology: Relative Total Yield
Through January 31, 2015
3%
2%
1%
0%
(1%)
(2%)
(3%)
(4%)
64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
50
April 7, 2015
PRISM Balances Weights Among Several Categories of Factors to Estimate Alpha
PRISM Models: Factor Weights
Model
Valuation
Category
Factor
Cyclicals
9.5%
Yields in excess of the market yield are positive
Free Cash Flow-to-Enterprise Value
5.2%
High free cash flow to enterprise value is positive
Price-to-Trailing Earnings (Sector Relative)
Price-to-Forward Earnings (Market Relative)
17.7%
10.6%
Growth
/ Sentiment
Profitability
Total Yield
IntraIndustry
Notes ("Positive" = increases expected alpha)
Dividend Yield (Market Relative)
Price-to-Forward Earnings
High trailing P/E relative to its sector is negative
High forward P/E relative to the market is negative
8.5%
High forward P/E is negative
8.0%
High total yields (dividends and net buybacks) are positive
Valuation Total
25.4%
ROE Variability
13.9%
Profitability Total
13.9%
6-Month Price Momentum
14.2%
12-Month Price Momentum (Market Relative)
18.3%
16.5%
Growth / Sentiment Total
32.5%
16.5%
34.3%
Volatile ROE is negative (i.e., more-cyclical cyclicals underperform)
0.0%
Strong 6-month price momentum is negative
Strong 12-month price momentum relative to the market is positive
Industry Earnings-Revision Dispersion
7.4%
Dispersion of earnings revisions among companies is negative
Forward Price-to-Earnings Disp. (Market Rel.)
14.7%
Dispersion in forward P/E among constituent stocks is negative
11.9%
Dispersion of trailing 3-month constituent stock returns is negative
3-Month Return Dispersion
Balance Sheet and
Capital Use
Defensive /
Neither
Intra-Industry Total
0.0%
Accruals
3.5%
Accruals (differences between cash flow and earnings) are negative
Change in Shares Outstanding (Sector Rel.)
5.8%
Adding shares faster than sector is negative
Price-to-Cash (Z-Score)
8.1%
Debt-to-Equity
34.1%
High cash balances (vs own history) are positive
15.2%
Inventory-to-Sales
10.8%
Balance Sheet and Capital Use Total
28.2%
15.2%
Overall Total
100.0%
100.0%
High leverage is negative
High inventories relative to sales are negative
51
April 7, 2015
Favored and Disfavored Industries in PRISM
PRISM Cyclical and
Defensive/Neither Models
Industries Ranked in Q1 and Q5
Industry
Air Freight & Logistics
Capital Markets
Commercial Services & Supplies
Computers & Peripherals
Gas Utilities
Health Care Providers & Services
Insurance
Road & Rail
Semiconductors & Semiconductor Equipment
Tobacco
Water Utilities
Automobiles
Biotechnology
Building Products
Construction Materials
Diversified Consumer Services
Electrical Equipment
Health Care Technology
Household Durables
Internet & Catalog Retail
Internet Software & Services
Personal Products
Real Estate Management & Development
Thrifts & Mortgage Finance
Current
Quintile
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q5
Q5
Q5
Q5
Q5
Q5
Q5
Q5
Q5
Q5
Q5
Q5
Q5
52
April 7, 2015
Part V: Arrows in the Quiver and the MOST Strategic Portfolio
•
MOST: 3-Month Alpha Model
•
BEST: 24-Month Alpha Model
•
Alpha Screener Website
•
MOST Strategic Portfolio
53
April 7, 2015
Stock Selection: There Are Important Synergies Between Fundamentals and Quant
8%
13%
52%
12%
10%
Annualized Average 1-Month Q1 - Q5 Return Spreads for BEST,
MOST and Combined, 1979-2011
Combined Spread Obtained from Quintiles Q1/Q2 - Q4/Q5
57%
Hit rate: 44%
6%
6%
4%
2%
0%
Fundamental
"MOST"
14%
14%
9%
Synergy
Note: Fundamental is the MS analysts Overweight vs. Equal / Underweights from 2003 to 2010; "MOST" is the Q1Q5 spread from our alpha model; Synergy is Overweight rated stocks in Q1 of MOST less Equal / Underweight in
Q5. Performance is annualized for MOST, "realized" during the recommendation period of the synergy.
Annualized Q1-Q5 Spread
14%
Performance of Various Approaches to Investing
2003 to 2010
13%
11%
12%
11%
10%
10%
9%
8%
7%
6%
Q1-Q5 BEST
Q1-Q5 MOST
Q1/Q2 -Q4/Q5 Synergy
Source: Morgan Stanley Research Note: Past performance is no guarantee of future results. Data as of October 31, 2010. Results shown represent total absolute return
(including dividends) and exclude brokerage commissions. These figures are not audited.
54
April 7, 2015
Our Alpha Models Produced Positive Alpha Over the Last Year
Alpha Models Return Residuals,
Through March 2015
12%
10%
8%
MOST
BEST
Synergy
6%
4%
2%
0%
(2%)
Last Month
Last 3 Months
Last 6 Months
Last 12 Months
Source: ClariFi, Thomson Reuters, Morgan Stanley Research. Past performance is no guarantee of future results.
55
April 7, 2015
Stock Selection: 2-Year (BEST) and 3-Month (MOST) Alpha Models for all U.S. Stocks
MOST vs. BEST Factor Weights: 1972-2009 (BEST) and 1979-2010 (MOST)
Macro-cyclicals
MOST
Balance Sheet and Capital Use
Technicals
Growth &
Sentiment
Profitability
Valuation
Category Factor
36-Month Forward Earnings-to-Price Z-score
Cash-to-Price
Dividend Yield
Earnings-to-Price
Free Cash Flow-to-Enterprise Value
Operating Cash Flow-to-Price
Price-to-Book Value
Price-to-EBIT
Price-to-EBITDA
Price-to-Forward Earnings
Price-to-Sales
Total Yield
Valuation Total
Defensives
BEST
MOST
Consumer Cyclicals
BEST
20%
MOST
BEST
10%
5%
18%
4%
13%
11%
8%
27%
15%
5%
7%
4%
30%
32%
Gross Margin
3%
7%
5%
15%
6%
24%
38%
20%
57%
6%
Incremental Margin
3%
ROE Variability
5%
Return on Invested Capital
Profitability Total
Estimate Dispersion
Long Term Growth Forecast
Sales Stability
Sales Variability
Up-to-Down Revisions
Growth & Sentiment Total
Bollinger Bands (10d, 21d, 63d)
Breakout Signals (168d, 336d, 672d)
Residual (21d)
Technicals Total
36-Month CapEx-to-Sales Z-score
Accruals
Asset Turnover
Assets - Debt Instantaneous Slope
CapEx-to-Assets
CapEx-to-Depreciation
CapEx-to-Sales
Cash-to-Assets
Change in Shares Outstanding
Debt-to-Assets
Dividend Payout Ratio
Inventory-to-Sales
Net Cash Ratio
Net Cash Variability
Net Debt-to-Market Cap
Y-o-Y Change in Debt-to-Capital
Balance Sheet and Capital Use Total
3%
3%
22%
45%
28%
8%
44%
29%
36%
Total
100%
100%
100%
100%
100%
100%
1%
1%
3%
5%
10%
10%
1%
24%
34%
4%
14%
9%
11%
7%
6%
9%
7%
7%
0%
6%
30%
23%
6%
5%
10%
23%
18%
5%
10%
17%
23%
-
30%
12%
7%
12%
-
4%
11%
5%
10%
8%
3%
10%
3%
7%
5%
1%
3%
8%
19%
10%
1%
14%
18%
18%
17%
6%
Factors unique to BEST are highlighted in the table above
56
April 7, 2015
Morgan Stanley Alpha Screener (www.morganstanley.com/equitystrategy)
Data shown above are for illustrative purposes only.
57
April 7, 2015
MOST Strategic Portfolio Relative Performance
MOST Strategic Portfolio Performance
December 31, 2014 to April 06, 2015
MOST Strategic Portfolio Performance
4.00%
100.0%
92.9%
80.0%
3.4%
3.50%
90.0%
78.3%
3.00%
2.5%
70.0%
2.50%
60.0%
50.0%
2.00%
40.0%
1.50%
30.0%
14.7%
20.0%
10.0%
1.00%
0.8%
0.50%
0.0%
S&P
Portfolio
Relative Performance
0.00%
S&P
Portfolio
Relative Performance
Source: Capital IQ, Thomson Reuters, Morgan Stanley Research. Past performance is no guarantee of future results. Results shown represent total absolute return (including
dividends) and exclude brokerage commissions. These figures are not audited
58
April 7, 2015
MOST Portfolio Performance Attribution
MOST Strategic Portfolio Performance Attribution
Sector
Overweight
Energy
Relative
Weight
7.3%
3.4%
3.9%
Portfolio
Sector
Sector
Weight
Return
28.0%
91.7%
16.0%
144.0%
12.0%
22.0%
Relative
Return
10.9%
26.9%
(2.3%)
Sector
Weight
20.7%
12.6%
8.1%
S&P 500
Sector Relative
Return
Return
80.8%
2.5%
117.1%
38.8%
24.3%
(53.9%)
Sector
Allocation
0.2%
(0.2%)
0.4%
Stock
Selection
2.0%
1.6%
0.3%
Total
2.2%
1.4%
0.8%
Market-Weights
Materials
Health Care
Financials
1.8%
0.8%
0.2%
1.8%
(0.3%)
(0.7%)
58.0%
4.0%
15.0%
18.0%
2.0%
19.0%
94.4%
156.1%
201.3%
47.8%
13.0%
49.9%
6.4%
115.5%
59.6%
(16.7%)
(27.8%)
(30.6%)
56.2%
3.2%
14.8%
16.2%
2.3%
19.7%
88.1%
40.6%
141.7%
64.5%
40.8%
80.4%
9.8%
(37.6%)
63.5%
(13.8%)
(37.4%)
2.2%
2.4%
0.3%
2.3%
(0.4%)
(0.2%)
0.3%
(0.3%)
3.7%
6.3%
(2.8%)
(0.2%)
(7.3%)
2.2%
4.0%
8.6%
(3.2%)
(0.3%)
(6.9%)
Underweights
Utilities
Industrials
Consumer Staples
(9.1%)
(2.1%)
(2.3%)
(4.7%)
14.0%
1.0%
8.0%
5.0%
115.3%
120.6%
72.1%
183.3%
38.7%
55.7%
(3.1%)
101.7%
23.1%
3.1%
10.3%
9.7%
76.5%
64.9%
75.1%
81.6%
(1.7%)
(13.4%)
(3.1%)
3.4%
2.2%
1.0%
0.8%
0.4%
8.1%
2.3%
0.3%
5.6%
10.3%
3.2%
1.1%
6.0%
0.0%
100.0%
92.9%
100.0%
78.3%
4.8%
9.8%
14.6%
Total
59
April 7, 2015
The MOST Strategic Portfolio
Weight
Ticker
Company
Price
S&P 500
Portfolio
12.7%
16.0%
Latest
Inclusion
Inclusion
MOST
MS Analyst
Date
Quintile
Rating
Auto Components
DAN
Dana Holding Corporation
1.0%
21.69
20.37
1/20/2015
Q1
Overweight
Media
CBS
CBS Corporation
1.0%
60.89
19.05
12/31/2010
Q1
Overweight
Auto Components
DLPH
Delphi Automotive PLC
2.0%
83.81
69.06
5/30/2014
Q1
Overweight
Hotels, Restaurants and Leisure
HOT
Starwood Hotels & Resorts Worldwide Inc.
1.0%
84.94
79.00
11/28/2014
Q2
Overweight
Hotels, Restaurants and Leisure
LVS
Las Vegas Sands Corp.
1.0%
56.85
68.13
8/8/2014
Q5
Equal-Weight
Textiles, Apparel and Luxury Goods
NKE
Nike, Inc.
2.0%
99.81
77.06
8/8/2014
Q2
Overweight
Multiline Retail
M
Macy's, Inc.
1.0%
68.02
59.60
10/3/2014
Q5
Equal-Weight
Automobiles
HOG
Harley-Davidson, Inc.
2.0%
61.64
56.49
10/13/2014
Q3
Overweight
Media
FOXA
Twenty-First Century Fox, Inc.
3.0%
34.43
30.36
3/15/2013
Q1
Overweight
Specialty Retail
LB
L Brands, Inc.
2.0%
94.86
50.49
4/26/2013
Q2
Overweight
Food Products
WWAV
The WhiteWave Foods Company
2.0%
45.69
21.27
11/29/2013
Q4
Overweight
Food and Staples Retailing
WMT
Wal-Mart Stores Inc.
1.0%
81.10
75.75
7/3/2014
Q1
Equal-Weight
Food and Staples Retailing
SFM
Sprouts Farmers Market, Inc.
2.0%
35.77
31.79
11/28/2014
Q1
Overweight
Oil, Gas and Consumable Fuels
APC
Anadarko Petroleum Corporation
1.0%
85.91
96.48
4/11/2014
Q5
Overweight
Energy Equipment and Services
SLB
Schlumberger Limited
3.0%
86.11
108.38
8/8/2014
Q5
Overweight
PSX
Phillips 66
2.0%
78.64
63.62
1/20/2015
Q2
Overweight
ETE
Energy Transfer Equity, L.P.
2.0%
63.93
58.26
7/3/2014
NA
Overweight
OXY
Occidental Petroleum Corporation
1.0%
76.58
79.77
11/28/2014
Q2
Overweight
VLO
Valero Energy Corporation
3.0%
59.74
55.93
5/9/2014
Q1
Overweight
Overweight
Consumer Staples
9.8%
Energy
8.1%
Financials
16.3%
5.0%
12.0%
18.0%
Capital Markets
KKR
KKR & Co. L.P.
2.0%
22.84
23.98
2/21/2014
NA
Banks
FITB
Fifth Third Bancorp
1.0%
18.98
21.63
7/3/2014
Q2
Overweight
Insurance
MMC
Marsh & McLennan Companies, Inc.
2.0%
57.01
47.96
2/21/2014
Q2
Equal-Weight
Banks
BAC
Bank of America Corporation
3.0%
15.56
15.82
11/29/2013
Q3
Overweight
Real Estate Investment Trusts (REITs)
CCI
Crown Castle International Corp.
3.0%
84.95
67.55
11/23/2012
Q5
Overweight
Consumer Finance
AXP
American Express Company
2.0%
79.78
92.42
11/28/2014
Q1
Overweight
Banks
HBAN
Huntington Bancshares Incorporated
2.0%
11.07
10.70
2/17/2015
Q4
Overweight
Banks
JPM
JPMorgan Chase & Co.
3.0%
60.56
42.42
12/31/2010
Q1
Overweight
Healthcare Providers and Services
MCK
McKesson Corporation
4.0%
224.56
77.74
2/4/2011
Q1
Overweight
CAH
Cardinal Health, Inc.
2.0%
90.03
38.31
12/31/2010
Q3
Equal-Weight
Biotechnology
BIIB
Biogen Inc.
4.0%
413.01
330.48
9/5/2014
Q2
Overweight
AET
Aetna Inc.
3.0%
107.93
91.98
1/20/2015
Q2
Overweight
Pharmaceuticals
PFE
Pfizer Inc.
2.0%
34.51
18.15
9/16/2011
Q1
Equal-Weight
Health Care
14.8%
15.0%
60
April 7, 2015
The MOST Strategic Portfolio (cont’d)
Weight
Inclusion
MOST
MS Analyst
Latest
Inclusion
Date
Quintile
Rating
2.0%
104.46
61.72
9/17/2012
Q3
Overweight
Union Pacific Corporation
1.0%
106.48
65.45
1/4/2013
Q5
Overweight
BA
The Boeing Company
1.0%
151.16
128.51
7/3/2014
Q2
NA
Airlines
DAL
Delta Air Lines, Inc.
1.0%
41.78
31.76
2/21/2014
Q1
Overweight
Machinery
SPW
SPX Corporation
1.0%
86.39
101.85
9/12/2014
Q2
Overweight
Aerospace and Defense
UTX
United Technologies Corporation
2.0%
117.97
78.85
12/30/2010
Q3
Overweight
Equal-Weight
Ticker
Company
HON
Honeywell International Inc.
Road and Rail
UNP
Industrials
S&P 500
10.3%
19.6%
Price
Portfolio
8.0%
19.0%
Internet Software and Services
GOOGL Google Inc.
3.0%
544.91
529.80
11/29/2013
Q2
CSCO
Cisco Systems, Inc.
2.0%
27.26
28.07
1/20/2015
Q2
Overweight
Apple Inc.
3.0%
127.43
60.34
1/6/2012
Q1
Overweight
Technology Hardware, Storage and PeripheraAAPL
Internet Software and Services
LNKD
Technology Hardware, Storage and PeripheraHPQ
LinkedIn Corporation
1.0%
249.50
192.62
2/21/2014
Q4
Overweight
Hewlett-Packard Company
3.0%
31.87
28.34
1/3/2014
Q1
Overweight
PANW
Palo Alto Networks, Inc.
1.0%
141.84
142.22
2/27/2015
Q4
Overweight
IT Services
XRX
Xerox Corporation
1.0%
12.93
12.39
10/13/2014
Q2
Overweight
IT Services
VNTV
Vantiv, Inc.
2.0%
38.48
31.95
8/8/2014
Q3
Overweight
IT Services
MA
MasterCard Incorporated
3.0%
87.39
34.60
1/17/2012
Q1
Overweight
Chemicals
LYB
LyondellBasell Industries N.V.
1.0%
90.95
34.50
10/28/2011
Q4
Overweight
Chemicals
EMN
Eastman Chemical Co.
1.0%
69.48
77.03
11/29/2013
Q4
Equal-Weight
Metals and Mining
X
United States Steel Corp.
1.0%
24.50
33.35
11/28/2014
Q1
Overweight
Chemicals
MON
Monsanto Company
1.0%
117.04
79.02
4/5/2012
Q3
Overweight
49.70
50.59
11/28/2014
Q1
Overweight
64.20
45.44
1/3/2014
Q2
Equal-Weight
Materials
3.2%
Diversified Telecommunication Services
2.3%
VZ
Verizon Communications Inc.
EIX
Edison International
Utilities
Electric Utilities
4.0%
2.0%
2.0%
3.1%
1.0%
1.0%
100%
100%
Source: Capital IQ, Thomson Reuters, Morgan Stanley Research Past performance is no guarantee of future results. Price performance does not take transaction costs into account. For companies in the portfolio, all important disclosures including
personal holdings disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures. ++Rating for this company has been removed from consideration in this report because,
under applicable law and/or Morgan Stanley policy, Morgan Stanley may be precluded from issuing such information with respect to this company at this time. NA = Not available NC = Not covered
61
April 7, 2015
Disclosure Section
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Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of
Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions
of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully
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An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
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(as of March 31, 2015)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equalweight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the
equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive
stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
62
April 7, 2015
Disclosure Section (Cont.)
Stock Rating Category
Coverage Universe
Investment Banking Clients (IBC)
% of
% of % of Rating
Count
Total
Count Total IBC Category
Overweight/Buy
1164
35%
331
43%
28%
Equal-weight/Hold
1466
44%
353
46%
24%
Not-Rated/Hold
100
3%
11
1%
11%
Underweight/Sell
605
18%
80
10%
13%
Total
3,335
775
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the
last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next
12-18 months.
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the next 12-18 months.
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coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the
next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
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indicated below.
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below.
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below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX;
Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.
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63
April 7, 2015
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US Equity Strategy: Monthly Strategy Guide - April

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