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Morgan Stanley Research recently published a report about US equity strategy. The report was extremely cautious and urged investors to buy stocks with sustainable dividends. Wal-Mart (NYSE:WMT), Intel (NASDAQ:INTC), Procter & Gamble (NYSE:PG), and McDonald’s (NYSE:MCD) were among Morgan Stanley’s top dividend stock picks (see the complete list here). Morgan Stanley also opined on the stocks they expect to underperform. “We noticed that during EPS season investors differentiated more between high and low quality. For instance, among the companies that guided down 2012 EPS, “low quality” stocks according to our framework dramatically underperformed high-quality stocks. We think lower-quality companies with potentially high margin expectations for 2012 are stocks to avoid,” Morgan Stanley’s report said.

Here is the list of “low quality” stocks with high margin expectations that Morgan Stanley is bearish about:

Stock

Ticker

Sector

ASPEN TECHNOLOGY INC

AZPN

Information Technology

RAMBUS INC

RMBS

Information Technology

SEATTLE GENETICS INC

SGEN

Healthcare

RANGE RESOURCES CORP

RRC

Energy

CIMAREX ENERGY CO

XEC

Energy

CUBIST PHARMACEUTICALS

CBST

Healthcare

NETSUITE INC

N

Information Technology

UNIVERSAL DISPLAY CORP

PANL

Information Technology

SKYWORKS SOLUTIONS INC

SWKS

Information Technology

INFORMATICA CORP

INFA

Information Technology

Morgan Stanley didn’t provide the details of their quantitative methodology that determine the quality of each stock. Their most bearish stock picks are from Information Technology, Healthcare, and Energy sectors where margins can be extremely high. Morgan Stanley is bearish about these stocks but four of these stocks are favored by hedge funds. There were 20 hedge funds with bullish bets in Range Resources (NYSE:RRC), Cubist Pharma (CBST), and Informatica (NASDAQ:INFA). John Griffin’s Blue Ridge Capital had $276 million in RRC at the end of September. Pasco Alfaro’s Miura Global Management had a $33 million position in Informatica. Cimarex is also among the popular stocks with 19 hedge funds. On the other hand hedge funds seem to agree with Morgan Stanley on three of these stocks: Rambus (NASDAQ:RMBS), Seattle Genetics (NASDAQ:SGEN), and Netsuite (NYSE:N).

We aren’t bearish about energy stocks, so we wouldn’t consider them as short candidates. We would definitely avoid the rest of the list and consider RMBS, SGEN, and N as short candidates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 10 Bearish Stock Picks From Morgan Stanley