Tech (and media and telecom) investors should start preparing their buy lists now ahead of a bear market low, Morgan Stanley said. The Wall Street firm expects stocks are about three months away from that bottom, meaning the technology sector could get an outsized boost from a strong rebound in the second half of the year, according to a Monday note. “History suggests that Tech bottoms coincidentally with the overall equity universe in bear markets, modestly underperforming into the trough and then materially outperforming post the low with a 100% positive return hit rate (1, 3, 6, and 12 months post trough), ” strategist Andrew Pauker wrote. Given this, the strategist offered an investment guide for the period before, during and after the stock market trough. He generally recommended investors wait for a more “durable” bottom before adding more risk to their portfolios. Before the bottom, higher quality and more defensive names should outperform, with entertainment, internet retail and software names leading the sector. In contrast, tech hardware and semiconductors tend to underperform during this period. This is because software names tend to be more sensitive to interest rates than either tech hardware or chip stocks. Netflix was among the names Morgan Stanley recommended for the period prior to the market bottom. Analyst Benjamin Swinburne has an equal weight rating on the streaming stock, but said it remains a “scaled, profitable market leader” in the sector. Netflix shares are up about 6% this year. NFLX YTD mountain Netflix in 2023 IBM is also a buy before the bear market bottom. Analyst Erik Woodring said the equal-weight rated stock is the “most defensive name in our universe,” and tends to outperform in late cycle environments. Woodring warned that it underperforms in the early cycle. IBM shares are down almost 8% this year. Verizon is also a buy ahead of a trough, and is overweight-rated by analyst Simon Flannery; the stock is down about 3% this year. Meanwhile, after the bear market low, Morgan Stanley said cyclicals, lower quality and value names have the most “impressive outperformance.” According to the note, internet retail, interactive media and services, semiconductors and tech hardware post the strongest relative returns. “Notably, cyclicals outperform defensives by 28%, on average, and low quality outperforms high quality by 20%, on average,” the note said. After the trough, shares of the Walt Disney Company are expected to outperform, even with the stock already up more than 16% this year. Analyst Benjamin Swinburne said the firm’s parks and advertising business should get a boost from a healthier consumer, as well as from “a new approach to managing and optimizing its Media business.” Morgan Stanley also recommends cloud computing firm Snowflake, rated overweight and down 1% in 2023. Analyst Keith Weiss said Snowflake is “well positioned” to benefit as companies build out their data cloud infrastructure to support artificial intelligence and machine learning initiatives. “The consumption pricing model is inherently volatile and sees a more direct impact of changes in the demand environment — while painful on the way down, SNOW should be among the first to accelerate out of the downturn,” Weiss wrote. Meanwhile, for investors trading through the trough and into the bull market, names such as Salesforce and Microsoft are buying opportunities, Morgan Stanley said.
