Morgan Stanley's Top Long Ideas For 2008

I've gotten my hands on a December 12th research report from Morgan Stanley. In the report they highlight their 2008 economic forecast, and highlight their single best stock recommendations for each industry they cover, all-in-all about 45 different stock recommendations, some long ideas, some short ideas (you may have heard they called Citigroup (C) the single best short idea for 2008). Other notable shorts are JetBlue (JBLU) and American Express (AXP). They recommend shorting AXP and against a long position in MasterCard (MA).

I read the report and found some interesting things to note. First, their economic forecast takes a different view than I have seen elsewhere. A few highlights:

1. "US stocks may outperform and the dollar should rally. Those views are out of concensus and not in the price."
2. "The rising risk of the US falling into an outright recession is, ironically, positive for the dollar against most currencies (except the JPY and the CHF). It looks increasingly likely that the dollar will rally in 2008, much as in 2005. In 1H08, the dollar will likely be propelled by fear; in 2H08 it will likely be driven by greed."
3. "A more aggressive Fed, an earnings recession, healthy growth abroad, and a scramble for liquidity all will reinforce our longstanding calls for steeper yield curves, higher volatility, and challenges for risky assets. While many of these themes are in the price, economic uncertainty may extend them further. And markets are not priced for the weakness in either US capital spending or the coming deceleration in overseas growth. As our colleagues outline in separate pieces, despite the US downturn, those factors lead to two paradoxical and out-of-consensus market conclusions: Outperformance in US stocks and a stronger US dollar."

Out of all of their stock picks, I've picked the top 5 long ideas in some of my favorite industries (in my opinion) to highlight here:

Agricultural Products

Monsanto (MON): They claim the R&D pipeline is underanalyzed and undervalued by the Street. They value the company by separating their core business and analyzing it separately from their pipeline, and then use a sum-of-the parts analysis. They assign a 20X multiple to their core business' 2008 earnings, yielding a $78 value, and value the pipeline with a 12.5% discount rate and 16.5X terminal cash flow multiple to projected pipeline cashflows, which yields a base case value of $46. So, their base case price target is $124. Their bull case target is $144 and the bear case is $80 (roughly 42% upside, 21% downside from Monday's closing price).

Clean Energy

First Solar (FSLR): They cite capacity expansion continuing to drive the stock price. 83% and 71% of 2008 and 2009 projected sales are pre-sold at fixed prices. They state they are relatively insulated from recession since nearly all of FSLR's sales are from Europe. They don't expect US sales to exceed 20% of revenues until 2010, at which point capex spending should be back in business. They also expect limited competition in 2008.

Biotechnology

Xenoport (XNPT): Xenoport is a biotech company currently valued around $1.4 billion market cap with a strong pipeline. Their report goes into the specifics about their pipeline which is currently focused on improving the absorption and bioavailability of drugs, in multi-billion dollar markets. Their drugs are focused on Restless Leg Syndrome [RLS], GERD, Parkinson's disease, Migraines, Nausea, and Muscle Spacticity. They see several 1H08 catalysts that could drive the stock higher. Surprisingly, the likelihood of a being a potential takeover candidate was not mentioned --- but another report I read from Argus does mention this and this is part of the reason I like them. Consolidation is likely to continue as Big Pharma continues to fight weak pipelines and huge infrastructures.

Internet & Consumer Software

Amazon (AMZN): In spite of the slowing economy, they believe Amazon's impressive execution could continue throughout 2008. They think AMZN has been "gaining share in online retail for good reason: high customer satisfaction built on selection, convenience, reliability, low prices, Amazon Prime, free shipping, a powerful recommendation engine based on data and best-in-class user experience, and lastly, network effects." They also think Kindle has the "ability to join the ranks of recent killer internet/interactive devices like Apples iPod and Nintendo Wii in driving razor-and-blade financial dynamics and shareholder value. User and revenue per user growth has been solid and long-term margin prospects should be assisted by third party sales and opex leverage. They note a relatively high short interest in AMZN, and have a 12 month price target of $125 for base case, $165 for their bull case, and $70 for their bear case.

Cable/Satellite

DirecTv Group (DTV): They cite superior pricing and subscriber growth and have a 2008 year-end price target of $33. They state their leadership position in the HD space should fuel subscriber growth and effectively weather weaker macroeconomic conditions. They like the Latin American business consolidation and believe attractive market dynamics and their attempts at providing greater transparency into DTV-LA will lead to an increased valuation. They also think the Liberty (LCAPA) /News Corp. (NWS) swap will be a positive catalyst for the stock via special dividends or buybacks.

Disclosure: Long MON, AMZN; Short FSLR (short term trade)

Comments

[jturano7423]

Tuesday,Dec.18th
Parker Hills story on XNPT only confirms my theory over and over for 2007.
Research firms for the most part do not know what their doing and are over paid to boot.
Case in Point:Friedman Billings downgraded XNPT on Dec.3rd.
Outperform to market perform.
Now at this point who will you rely on, Morgan Stanley or Friedmans & billings?
No brainer!
What mutual funds or companies rely soley on Friedmans&billings...
There are plenty of mis-calls based on their downgrades or upgrades or especially their target prices.
Example: Not just past year but how about past two years on "NSTK' alone.
And if you follow Cramer your cooked unless your short on the stock while you buy the shares for the immediate rise do to his Touting.
The small investor has so many obstacles to endure along the way but if they just read articles like this gentleman wrote today,
there would be less financial horrors in ones portfolio.
Thanks parker Hill!

[rodcore]

I don't see one "new idea" here other than perhaps the biotech.

[alpha24seven]

MON has some serious issues about to be served up. I recently read a report whereby they say the Chinese pet food scandal had nothing to do with Melamine. It had everything to do with rogue genetically modified food stuff in the pet food that was lethal. The GM ingredients were responsible for the deaths of thousands of Americans beloved pets. This can/will be the GM food and seed industries worst nightmare. Actual deaths attributed to GM products.This has never happened before. Not MON products but it makes no difference. The anti GM orgs along with a Dem Congress will crucify the GM companies.

[Neal VG]

First Solar will be hurt if the dollar rises as expected as almost all revenue is priced in Euros. Germany has already stated they are now favoring wind power over solar. A defenite political risk for this stock. The 2007 US energy bill gave no incentives to solar. Even at these oil prices the $$ cost/benefit to using solar over oil are not justified unless given a governmental incentive, and oil will not stay as these levels during a softer economy let alone a recession. Don't be burned by this bad call.

[solar jim]

Hey 131417, since you don't actually state what price levels would work for it, what is the oil price amount that the "$$ cost/benefit" of using solar is justified? Since it's not very obvious at all that you've done the work on it from your comment above, other than stating an opinion, what is the range within which solar becomes feasible at what oil price??? Nice to have an opinion, but it would help if you actually had some, you know, data.

You know, you're probably right seeing how it's been such a BAD call since late 2006 to own this one only going up roughly 1000%. And exactly how much is FSLR's profit going to be hurt if the dollar rises? How much will their earnings decrease? Will they be losing money then? Or just less? If less, how much less? Without that information you're simply a cheerleader on the sideline doing a routine hoping it goes down. Just as bad as the people pumping up a stock on no data or info.

[solar jim]

Agree with Rodcore that no new info on this post other than maybe the biotech. All these others have been known for some time and are not "new" ideas. April of 2007 was the time for AMZN, not after it's up close to 100% since then. Same for MON. Time to really buy FSLR was in Feb of 2007 after they reported the first blowout qtr. While you could still make money on FSLR, it won't be as much as what you've already missed. They have a 25 p/e on 2010 earnings, and that's using analasys of previous qtr's results with no extra for further efficiency gains, line speed increases, further plant expansion, etc... The 25 p/e could very easily be overstated to the high side if they continue to increase overall efficiency as they have to date...

[parker]

Nothing in the MS report or in my article stated any idea was necessarily "new". Just highlighting a few stocks in their report where I like their rationale and agree will likely outperform in 2008.

[solar jim]

Agreed. A few, if not all, should outperform the overall market next year. The biotech play will, of course, depend mostly on phase trial data being good and/or a takeover for an upward move of any size. I also agree that Monsanto is not valued correctly. Every year there is more GM crops than the previous. Its a good long term play.