Quality Stocks Like Amazon Are Still Receiving Heavy Blows

It has been quite some time since quality stocks have been in vogue. There are several stocks in this category that have been slammed by the market but still have bright outlooks-and they could be potential investments. 

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Quality stocks can be defined in many ways. While many of them are in defensive sectors such as healthcare, consumer staples, and utilities, which are always in demand even as households and businesses cut their budgets, there are some in offensive sectors as well.

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Some companies maintain high-profit margins because they are so competitive, if not dominant, in their industry.

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The performance of many of the stocks has been poor over the last few months. These exchange-traded funds are down between 7% and 13% from their record highs. These include Health Care Select Sector SPDR ETFs (XLV XLV -0.50%), Vanguard Consumer Staples ETFs (VDC VDC +0.35%), and Utilities Select Sector SPDR Funds XLU +0.65% (XLU). The VanEck MSCI International Quality Exchange-Traded Fund (QUAL) is down about 14% from its high.

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A large part of the reason these indexes and funds have underperformed this year is that last year, they outperformed as investors feared interest-rate increases might trigger a recession.

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Stocks have outperformed this year in companies whose profit forecasts have dropped the most and could recover the most quickly. As a result, some quality stocks are on sale. Investors interested in names with a particularly bright future should take advantage of this opportunity. 

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These stocks were screened by Morgan Stanley strategists. As of Monday, they looked for stocks underperforming their relevant S&P 500 sectors by at least five percentage points, as well as down at least 10% in the past year. Of those, the strategists selected those with price targets representing at least 20% upside from current levels and rated 'Overweight' by the bank's analysts. There must be at least $1 billion in market capitalization for the companies. 

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Here are the following stocks that made the cut:

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Amazon.com (AMZN): As interest rates rise, future profits become less valuable in current terms, a problem for the company since much of its profit will come years from now. The company has fallen by over 35% in the past year as higher interest rates make future profits less valuable. There have been lower margins due to rising labor and logistics costs. 

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However, Morgan Stanley analysts expect the stock to rise more than 50% from its current level. In 2024, sales should grow by about 13% to $630 billion as cloud sales expand to new customers and its e-commerce platform is leveraged to sell more advertisements, according to FactSet. The company's profit margins should expand again, resulting in a 61% rise in earnings per share under generally accepted accounting principles. This company has a lot of potential for growth if rates stabilize and it executes. 

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Match Group (MTCH): In the past year, the stock has declined by about 62%. Although the company's operating margin is usually about double that of the S&P 500, it has had trouble following through on its user and monetization growth strategy in recent months. As the rate of interest has increased, so has the value of the dollar. If the company can achieve expected EPS growth and the dollar does not surge again, Morgan Stanley analysts see about a 90% upside. 

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Snowflake (SNOW): There has been a 42% decline in its stock price over the past year. The company's valuation has been crushed by higher rates. Despite top-line growth at over 30% for years to come, margins are expanding and EPS could explode higher. The stock trades at just under 20 times the expected 2023 sales of $2.9 billion. Since analysts' EPS forecasts have only risen in the past year, Morgan Stanley analysts see a 38% upside in the stock. 

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Centene (CNC): EPS estimates for 2023 have slipped for the healthcare services company, resulting in a 13% drop in stock price. In 2027, analysts expect premium revenue to rise to about $165 billion from just under $145 billion in 2022. According to Morgan Stanley analysts, the share price could rise by 44%. 

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