Morgan Stanley’s ‘Vintage Values’ Portfolio Underweight On Value

Every year Morgan Stanley chooses the stocks that it has the most confidence in for a one-year investment horizon and releases them as its Vintage Value portfolio. The bank’s research analysts submit more than 50 of their favorite stocks with market caps over $1 billion, with an emphasis on risk/reward profiles, clear catalysts within the next year, and differentiated research that shows ‘out of consensus’ thinking. The researchers list is then whittled down to 15 by senior members of the Wealth Management Strategy and Research groups. Last year’s Vintage Values portfolio edged out the S&P 500 (INDEXSP:.INX) 24.9% to 21.3% between July 10, 2013 and July 8, 2014, and even though Morgan Stanley is forecasting a much flatter year, it hopes to outperform by a similar spread.

Vintage Values overweight on large, high quality growth stocks

Taken as a whole, the Vintage Value portfolio shows that Morgan Stanley analysts are preparing for a less impressive year than the last 52 weeks and that they recommend investing in relatively safe companies. Small-caps are excluded by the $1 billion minimum market cap, but the Vintage Value portfolio is still heavily weighted toward mega- and large-cap stocks, allocating just 7.7% to mid-caps compared to 43.1% for the S&P 500. There’s a similar emphasis on high quality earnings and a slightly stronger for defensives than cyclicals compared to the benchmark. The portfolio is 16.8 pp overweight growth stocks and 11.9pp underweight value (despite the name), but it still looks like a conservative list overall.

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Financials are the most overweight sector, 7.1 pp higher than the S&P 500, and information technology is the most underweight with a 3.6 pp smaller allocation. The portfolio is also overweight materials, consumer discretionary, and health care.

Vintage Values stocks cost more, but have better margins

As you would guess from a portfolio that underweights value stocks, Vintage Values stocks are more expensive than the benchmark with 12-month forward PE of 16x versus 15.7x for the S&P 500 (INDEXSP:.INX) (both values are as of June 18) among other measures, though slightly cheaper when measured according to price-to-book (2.5x to 2.7x). The higher costs are offset by better profitability, with incremental margins and gross margins both stronger in the Vintage Values portfolio than for the benchmark, and better sales stability. So while Morgan Stanley hasn’t chosen the cheapest stocks available, they do seem more robust than the rest of the market if the recovery misses a beat.

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