Morgan Stanley says stock picking will matter more in coming weeks so buy these quality names

Published Mon, Jul 24 202312:15 PM EDTUpdated Mon, Jul 24 20231:40 PM EDT

As corporate earnings season reaches its peak in the coming weeks, Morgan Stanley advises traders to look for certain stock plays. A third of the S & P 500 companies are set to announce earnings this week, as well as 40% of the Dow Jones Industrial Average. Investors will be keeping a close eye on mega-cap tech names Alphabet, Meta and Microsoft, which have all seen shares surge amid the tech rally this year. Oil giants Chevron and ExxonMobil are also set to report their quarterly results, as well as major telecom companies and consumer names. Morgan Stanley chief equity strategist Mike Wilson said in a Monday note that he expects "performance dispersion to rise" as more companies report their earnings. Wilson recommends investors choose stocks that exhibit high earnings quality, strong free cash flow generation and improving bottom-line revision. The firm screened for stocks that fell under the following criteria: Top 1,000 U.S. stocks by market cap Top 2 quintiles of earnings stability Top 2 quintiles of earnings quality Overweight rating by the firm's research analysts Take a look at some of the names on the list, and where they could be headed next. Health-care names UnitedHealth Group , Humana and Elevance Health all appeared on Morgan Stanley's screen. UnitedHealth Group, which is the largest health-care company in the U.S., is also one of the names listed on the 30-stock Dow. The company's second-quarter results beat analysts' expectations on both top and bottom lines. Investor sentiment was further boosted by the company raising the lo end of its full-year adjusted earnings outlook. To be sure, shares are still down 4% year to date, underperforming the Health Care Sector SDPR Fund , which has traded near the flat line in 2023. T-Mobile , another one of Morgan Stanley's picks, will be releasing its quarterly results Thursday. Shares have only gained 1% in 2023, lagging behind the broad market index's 18.3% rise over the same period. Nonetheless, more than 90% of analysts covering the stock rate it a buy, according to Refinitiv. The consensus price target on shares implies nearly 26% upside from Friday's close. Automaker General Motors also made the list. The company is set to report earnings Tuesday before the bell. Wall Street will be looking to see if GM can continue its outperformance from the prior quarter, during which it posted an earnings beat and raised its 2023 guidance. Analysts polled by Refinitv estimate GM's earnings have jumped more than 60% in the second quarter. The stock has gained more than 16% this year. Household products manufacturer Colgate-Palmolive , another one of Morgan Stanley's picks, will announce earnings at the end of this week. Colgate-Palmolive has recouped some of its losses from the start of 2023 , but is still trading down 2% year to date. Analyst Dara Mohsenian upgraded shares to overweight from equal weight in January, and also named it his top pick in the household and personal-care industry. Disclosure: Comcast is the parent company of NBCUniversal and CNBC. —CNBC's Michael Bloom contributed to this report.