An intelligent investor is a patient investor, committed to the long term. Warren Buffett, a legend in the markets, has long been known for his support of long-term holdings, as has banking giant Morgan Stanley. The bank’s annual “Vintage Values” report lists the company’s best stocks for a buy-and-hold strategy over a one-year horizon.
Vintage Values’ current list has a lot to say on the topic, but a few features of their picks stand out. First, all of their picks are mid- or large-cap stocks. Second, their Vintage Values selections lean heavily towards high-quality names. And finally, these names are trading at a cheap price relative to the market.
There’s another important point to make about Morgan Stanley’s list of vintage stocks. Since they started publishing these estimates 14 years ago, the list has tended to outperform the S&P 500. The 2022-2023 list, the predecessor to this one, beat the index by 941 basis points over 12 months.
So let’s see what Morgan Stanley believes investors should buy and hold. Here are two of the company’s vintage values.
NextEra Energy, Inc. (BORN)
The first Vintage Value pick we’re looking at is NextEra, a renewable energy company and a major component of the clean energy sector. NextEra has between $85 billion and $95 billion in infrastructure improvements planned over the next two years and has 67 gigawatts of power generation in operation. NextEra owns Florida Power & Light, the largest electric utility in the United States, and provides power to more than 12 million people across the state of Florida.
In addition to its Florida operations, NextEra has assets in several other states, including zero-emissions nuclear power generation in Wisconsin and New Hampshire. The company is a leader in wind and solar energy production and operates numerous renewable energy production facilities in Texas.
All of this is good, but NextEra sees the future of energy production as hydrogen energy. The company is working with U.S. government agencies to develop and finance green hydrogen energy projects and is investing up to $20 billion in hydrogen capital projects, with the goal of developing up to 15 gigawatts of hydrogen generation. renewable energy from hydrogen by 2026.
Ultimately, the company’s revenues have been increasing in recent years. In its latest quarterly report, for 2Q23, NextEra reported revenue of $7.35 billion, beating estimates of $1.18 billion and rising nearly 42% year-over-year. The company’s bottom line, non-GAAP EPS of 88 cents, was 6 cents per share better than expected.
All this leads Morgan Stanley’s David Arcaro to have an optimistic view of the company. The analyst writes: “We remain optimistic given low earnings risk, continued strong demand for renewables, improving supply chain environment and upside in green hydrogen…Hydrogen projects will require deep expertise in several areas where NEE has advantages. We expect NEE to become a leader in the green hydrogen market regardless of Treasury regulations.”
Arcaro’s comments confirm his Overweight (i.e. Buy) rating on NEE, and his price target, now set at $90, suggests approximately 30% upside potential on a one-year horizon. (To see Arcaro’s track record, click here)
Overall, this stock has attracted 10 recent reviews from the Street, with a split of 8 to 2 in favor of Buys over Holds for a Strong Buy consensus rating. The stock’s trading price of $69.28 and average target price of $84.90 give the stock a potential gain of about 23% over the next 12 months. (See NextEra Stock Forecast)
Medtronic PLC (MDT)
The next stock we’ll look at from the Morgan Stanley Vintage Value list is Medtronic, a medical device company with a wide range of products targeting a variety of conditions. The company has a global footprint and is a leader in healthcare technology, describing its mission as “attacking the most challenging healthcare problems facing humanity.”
Some basic numbers will show the scale and scope of Medtronic’s operations. The company’s products have helped more than 74 million patients over the years, and looking ahead, Medtronic has more than 210 active clinical trials testing new devices and products. In fiscal 2023, which ended last April, Medtronic reported making $2.7 billion worth of research and development investments, a solid indicator of confidence in its approach. And, of particular interest to yield-conscious investors, the company paid $3.6 billion in dividends to its shareholders in fiscal 2023.
It’s worth taking a closer look at the dividend. Medtronic has already declared its dividend for fiscal 2Q24. The payment of 69 cents per common share marks an increase of 1 cent from the year-ago quarter and will annualize to 3.4%. The company has a history of dividends dating back to the 1970s.
Medtronic last reported earnings for the first quarter of fiscal 2024 and showed a 4.5% year-over-year increase in the top line; revenue of $7.7 billion exceeded forecasts by more than $144 million. The company’s non-GAAP EPS of $1.20 per share was 9 cents better than expected. In a move that bodes well for the future, Medtronic also raised its earnings forecast, to the range of $5.08 to $5.16 per share, or a 7-cent increase at the midpoint. This compares to the consensus expectation of $5.05 for EPS.
Looking under the hood of this stock, Morgan Stanley’s Patrick Wood lays out multiple reasons for an optimistic outlook: “We see MDT’s pipes as well stocked from an innovation perspective (e.g. Inceptiv, 780G, Simplera, Spyral, Micra , Pulse Select etc.), and gross margins are trending in the right direction with a c. 115 bps beat despite heavy S&OP and supply chain work. In fact, gross margin delivery is back at c. 68% it’s worth ~12% just to pool profits, and we expect MDT to drive more consistent execution as it consolidates supply and production.”
“Operations at P/E below 15x calendar ’24, although we expect consistent MSD organic growth and potential c. With a 200 basis point upside to margins, coupled with a less crowded positioning, we remain bullish on MDT stock,” Wood summed up.
Bullish means an Overweight (i.e. Buy) rating and a $104 price target pointing towards a one-year upside potential of 27%. (To see Wood’s resume, Click here)
Overall, Medtronic gets a Moderate Buy rating from the analyst consensus. The 16 recent analyst revisions include 8 Buys, 6 Holds, and 2 Sells, while the average price target of $94.80 suggests an upside of approximately 16% from the current trading price of $81.96. (See MDT Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.