• Morgan Stanley says new technologies are feeding into a surge in productivity that will help the economy for years.
  • Strategist Adam Virgadamo says the pandemic will speed up that change, and investors don’t have to buy tech stocks to reap the rewards. 
  • He’s compiled a list of innovators that have been outperforming and look like they will continue to do based on their strategies and investments in their businesses.
  • Visit Business Insider’s homepage for more stories.

New technology has permeated so many industries and transformed business. But when investors want long-term growth, they’re mostly buying the same mega-cap tech stocks.

That’s stayed true even as some experts have warned about the sky-high prices of those same stocks, raising the spectre of the dot-com bubble 20 years ago and the dominance of a handful of giant stocks that hit record levels.

Whether there’s a bubble or not, Adam Virgadamo, a US equity strategist at Morgan Stanley, says investors need to be aware of the alternatives. He writes that technology is contributing to growth and bolstering economic productivity, feeding a secular bull market that dates to 2011 and didn’t end with the coronavirus crash.

“We are in the early innings of a technology-driven, decade-long investment cycle centered on data and digitalization that allows businesses to gain insights and improve productivity,” Virgadamo wrote in a note to clients.

He adds that the pandemic and its after-effects are only going to speed up that shift as companies look for ways to save money.

“[The recession] is a wakeup call to accelerate this digital transformation as companies with a greater digital presence are showing more resiliency in the wake of the pandemic,” he wrote. “We see a clear mindset shift at the executive level from viewing technology as supporting the business to technology becoming the business.” 

Many of the companies that are positioned to benefit from that transformation are already outperforming on the stock market, and that, in turn, could help broaden the performance of the market and close the gap between most stocks and Big Tech. That’s something most investors would see as healthy even if they’re not concerned about a bubble.

With that in mind, Virgadamo and his colleagues named 16 non-technology companies that are investing in revamping their businesses through innovations like digital banking, contactless payments, e-commerce updates, fuel storage cells, or more broadly by eliminating costs using improved software and other tech upgrades.

An older list of companies with a similar theme has outperformed. And looking at these stocks over the last three years, many of the newer additions have also provided market-beating returns. 

All 16 of the following companies are rated “Overweight” by Morgan Stanley’s analysts, in part because of the potential benefits of the trends Virgadamo is highlighting. Those companies are ranked from lowest to highest based on how much upside they have relative to Morgan Stanley’s price targets.

Those percentages were calculated based on Thursday’s closing prices.

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16. New Fortress Energy

New Fortress Energy


Ticker: NFE

Sector: Energy

Thesis: “We see NFE as one of the best ways to play structurally cheap natural global natural gas prices today and the potential for low-cost green hydrogen in the future.” 

Price target: $27

Upside to target: -38.4%

Source: Morgan Stanley

15. Penn National Gaming

Penn National Gaming


Ticker: PENN

Sector: Consumer discretionary

Thesis: “Facing COVID-19 headwinds, US casinos are innovating, with CZR and PENN at the forefront. We see three positive structural shifts: 1) Transition from cash to cashless payments … 2) operators embracing email marketing … and 3) broader legalization of online gambling.”

Price target: $55

Upside to target: -25.7%

Source: Morgan Stanley

14. Caesars Entertainment

Caesars Entertainment


Ticker: CZR

Sector: Consumer discretionary

Thesis: “Facing COVID-19 headwinds, US casinos are innovating, with CZR and PENN at the forefront. We see three positive structural shifts: 1) Transition from cash to cashless payments … 2) operators embracing email marketing … and 3) broader legalization of online gambling.”

Price target: $54

Upside to target: -5.4%

Source: Morgan Stanley

13. Walmart

Walmart


Ticker: WMT

Sector: Consumer staples

Thesis: “WMT is exploring and investing in emerging assets spanning technology, payments, subscriptions, and fulfillment. Over time, we believe these assets can be utilized to leverage and enhance WMT’s core store-based retail and e-commerce businesses.”

Price target: $150

Upside to target: 4.8%

Source: Morgan Stanley

12. Progressive

Progressive


Ticker: PGR

Sector: Financials

Thesis: “Progressive has benefited from being a first player in tech trends: Direct-to-consumer (online) distribution and usage-based-insurance (telematics) pricing.”

Price target: $98

Upside to target: 4.9%

Source: Morgan Stanley

11. T-Mobile

T-Mobile


Ticker: TMUS

Sector: Communication services

Thesis: “5G technology can enable significant TAM [total addressable market] expansion for wireless carriers via fixed wireless home broadband … The home broadband market offers an $80bn+ adjacent TAM with incremental subscribers having high contribution margin.”

Price target: $124

Upside to target: 7.1%

Source: Morgan Stanley

10. Stanley Black & Decker

Stanley Black & Decker


Ticker: SWK

Sector: Industrials

Thesis: “SWK is developing solutions to digitize and automate its manufacturing, which includes using artificial intelligence and advanced analytic tools … we see significant gains from this initiative as it relates to the shortening of supply chains.”

Price target: $191

Upside to target: 17.4%

Source: Morgan Stanley

9. Invitation Homes

Invitation Homes


Ticker: INVH

Sector: Real estate

Thesis: “The company is positioned to be a ‘buyer of choice’ as the iBuyer market continues to grow. … As the largest public [single family REIT] operator the company has a scale advantage vs peers given better market density that helps to drive operational efficiencies and organic growth.” 

Price target: $34

Upside to target: 18.2%

Source: Morgan Stanley

8. Teck Resources

Teck Resources


Ticker: TECK

Sector: Materials

Thesis: “We believe TECK’s Race21 initiative … will boost safety records, reduce mining costs and improve predictive maintenance.”

Price target: $17

Upside to target: 20.9%

Source: Morgan Stanley

7. Raymond James Financial

Raymond James


Ticker: RJF

Sector: Financials

Thesis: “The wealth management industry is in the midst of a monumental shift toward digitization. … RJF is one of the leading beneficiaries of this shift.”

Price target: $91

Upside to target: 25.2%

Source: Morgan Stanley

6. Citizens Financial Group

Citizens Financial


Ticker: CFG

Sector: Financials

Thesis: “Citizens is accelerating its digital transformation, which we expect to drive improved efficiency and profitability over the next several years.”

Price target: $33

Upside to target: 29.8%

Source: Morgan Stanley

5. Match Group

Match Group


Ticker: MTCH

Sector: Communication services

Thesis: “We see a long and growing runway for subscriber growth given demographic tailwinds, increasing smartphone penetration/technology advances, and greater adoption of online dating.” 

Price target: $151

Upside to target: 29.9%

Source: Morgan Stanley

4. AES

AES


Ticker: AES

Sector: Utilities

Thesis: “AES also provides multiple upside opportunities and exposure to the multi-decade decarbonization theme through its renewable energy and battery storage businesses.”  

Price target: $23.50

Upside to target: 31.1%

Source: Morgan Stanley

3. Bloom Energy

Bloom Energy


Ticker: BE

Sector: Industrials

Thesis: “BE is advancing its natural gas fuel cell technology by increasing the energy density … This evolution lowers the cost of electricity generation for the company’s customers and makes its products economic versus the electric grid in more states.”  

Price target: $23

Upside to target: 33.1%

Source: Morgan Stanley

2. Northrop Grumman

Northrop Grumman


Ticker: NOC

Sector: Industrials

Thesis: “The company’s portfolio is strategically positioned for the Department of Defense’s investments in advanced capabilities.”

Price target: $470

Upside to target: 50.7%

Source: Morgan Stanley

1. Schlumberger

Schlumberger


Ticker: SLB

Sector: Energy

Thesis: “Oilfield service companies like SLB are turning to technology and digital solutions as a means to drive cost savings for customers internally and externally. … We expect that the current down cycle and global pandemic accelerate customer adoption of SLB’s digital products, firstly as a means to cut costs, but also for safety reasons.”

Price target: $25

Upside to target: 66.6%

Source: Morgan Stanley

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