Investing

5 Stocks to Rotate to Now as Stock Market Melt-Up Rally Hits a Massive Wall

Morgan Stanley

This is one of Wall Street’s white-glove firms, and it may be among the best buys in the banking and investment arena. Morgan Stanley (NYSE: MS) is a global investment bank with leading positions in investment banking (M&A and equity underwriting), equity trading and wealth management, which contributes nearly 50% of firmwide revenues. The firm also has an asset management business, which adds to the lower-risk business profile the firm has pursued since the financial crisis.

Earlier this year, the Wall Street investment bank agreed on a $13 billion purchase of discount brokerage E-Trade. With 5.2 million customers, it was once a revolutionary platform that “helped usher in a dramatic shift among financial services firms” and fueled the rise of indexes and exchange-traded funds, making investing vastly easier for do-it-yourself investors. The deal is still expected to close.

Its dividend yield is 3.14%. The $50 BofA Securities price target compares with the $48.71 consensus price target. Morgan Stanley stock fell over 8% Thursday to close at $44.57.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian Basin and in the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. The company recently updated 2020 and 2021 hedging, adding $1.2 billion to cash flow estimates over next two years. It also added a new $900 million credit facility, which enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.

BofA Securities noted this after the company reported results in May:

We think Pioneer Resources has the potential to lead the industry with a disciplined model that has moderate growth capped by a defined reinvestment framework and which focuses on cash returns. Absent guidance from management our base case assumes coming out of this crisis the company adopts a growth model at half its prior levels. In our view it is a business model that Pioneers assets can support; but where it needs the support is management willing to acknowledge that the ‘old’ E&P model is broken.

BofA Securities recently raised its $111 price target to $126. The consensus target is $113.36. Pioneer Natural Resources stock most recently closed at $96.64, down just under 6% on the day.

Southwest Airlines

This company continues to expand routes, remains a low-cost leader and is one of the top airline picks across Wall Street. Southwest Airlines Inc. (NYSE: LUV) operates a passenger airline that provides scheduled air transportation services in the United States and near-international markets. It was one of the airlines with the fewest delays last year.

As of December 31, 2019, the company operated a total of 747 Boeing 737 aircraft, and it served 101 destinations in 40 states, the District of Columbia and the Commonwealth of Puerto Rico, as well as 10 near-international countries, including Mexico, Jamaica, the Bahamas, Aruba, the Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos.

Southwest recently had a massive stock sale to raise cash and improve the balance sheet. The analysts noted this in a recent research report:

Southwest Airlines completed a $3.9 billion capital raise which brings total liquidity to $14.8 billion after all the government payroll support funds. At a cash burn of $34 million per day, the company has enough liquidity to get through the next 435 days (vs 320 days for Delta / 225 days for United). Even with a slow recovery, we expect Southwest to end 2020 with $10 billion in cash and $1.5 billion in net debt.

The company has suspended the dividend until September of 2021. BofA Securities just raised its $38 price target to $44. The consensus target is $39.63, and the last trade Thursday for Southwest Airlines stock came in at $32.83.

Buying these top stocks is not like chasing the FANG stocks at all-time highs. These have severely lagged the rest of the “melt-up” rally winners and, while they are well off the March lows, they offer far better positioning for the second half of 2020 and even into 2021 than perhaps the overbought and very expensive momentum stocks hold.

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