Now may not be the best time to buy stocks, with the S&P 500 trading within 2% of its July 16 record high.
Valuations are stretched. The S&P 500’s forward price-earnings ratio was 21 as of Aug. 16, well above its five-year average of 19.4 and its 10-year average of 17.9, according to FactSet.
Plenty of experts, such as hedge fund manager Doug Kass and author The Street Pro's Daily Diary, think we’re due for a correction.
To be sure, bulls say strong corporate earnings will continue to propel the market higher. Blended S&P 500 profit has registered whopping growth of 10.9% for the second quarter, according to FactSet.
The blend includes the 93% of S&P 500 companies that have reported earnings already and analyst forecasts for the remainder. Analysts project a profit increase of 5.2% for the third quarter, according to FactSet.
In any case, it can’t hurt to have some stocks to buy in mind whenever you decide the time is right.
Morgan Stanley put together a list of top stock picks that might be helpful in that regard.
Here are five of their stock picks, in alphabetical order, along with Morningstar’s assessment of each, according to CNBC.
Morgan Stanley’s top stock picks
Apple (AAPL)
Morningstar moat rating: wide, meaning it sees the company having competitive advantages that will last at least 20 years. Morningstar fair value estimate: $185. Thursday quote: $224.
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“We believe Apple has cemented a long-term position atop the consumer electronics industry with a focus on a premium ecosystem of tightly integrated hardware, software, and services,” wrote Morningstar analyst William Kerwin.
“We expect strong revenue growth in fiscal 2025, as users upgrade their iPhones to take advantage of Apple’s generative artificial intelligence features.”
DraftKings (DKNG)
Morningstar moat: none, which means it sees no sustainable competitive advantage. Morningstar fair value estimate: $47. Thursday quote: $35.30.
Related: Analysts adjust DraftKings stock price target following earnings
“DraftKings has extended its leading daily fantasy sports position, first established in 2012, into one of the top positions in the North American sports betting and iGaming market,” wrote Morningstar analyst Doug Wasiolek. And it’s a growing market.
“Sports betting and iGaming are currently legal in around 40 and seven states, respectively. And we expect another handful to be added to each market in the next few years.”
Eli Lilly (LLY)
Morningstar moat rating: wide. Morningstar fair value estimate: $580. Thursday quote: $953.
You’ve probably heard of Lilly’s blockbuster drug for diabetes/weight loss: Mounjaro/Zepbound. (It’s one drug with two names).
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“Eli Lilly's innovative culture and strong financial commitment to developing the next generation of drugs set the company apart from its peers and fuel its long-term growth,” wrote Morningstar analyst Damien Conover.
“Lilly holds industry-leading growth potential, as the company is launching several new blockbusters and patent losses are fading.”
Silicon chips and potato chips
Nvidia (NVDA)
Morningstar moat rating: wide. Morningstar fair value estimate: $105. Thursday quote: $124.
Related: Analyst resets Nvidia stock price target before earnings
Not surprisingly, Morningstar analyst Brian Colello likes the company for its “market leadership in graphics processing units.”
Those are hardware and software tools needed to enable the “exponentially growing market around artificial intelligence,” he said.
“In the long run, we expect tech titans to strive to find second-sources or in-house solutions to diversify away from Nvidia in AI. But most likely these efforts … won’t supplant, Nvidia’s AI dominance.”
PepsiCo (PEP)
Morningstar moat rating: wide. Morningstar fair value estimate: $176. Thursday quote: $175.
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“Following years of anemic growth due to operational missteps and underinvestment, management has worked to right PepsiCo’s ship. We think there is more room to go,” wrote Morningstar analyst Dan Su.
Going forward, Pepsi should benefit from:
- “secular tailwinds in the snack business,
- growth initiatives in select attractive beverage sub-categories (such as energy drinks),
- various emerging markets (such as Latin America, Africa, and Asia-Pacific), and
- an integrated business model facilitating more effective commercialization,” he said.
Turning back to the market as a whole, whatever you do, proceed with caution. “Careful stock selection based on idiosyncratic factors is especially important in this type of environment,” Morgan Stanley said.
The author of this story owns shares of Apple, Eli Lilly and PepsiCo.
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