In this piece, we will take a look at Morgan Stanley’s highest conviction stocks and the top 20 stocks to buy.
With the second half of 2024 having settled in, the broader economic environment that will determine the future course of the stock market is becoming clearer. While the surge in investor interest surrounding artificial intelligence stocks placed the macroeconomic picture in the background for a while, now, as the second quarter earnings season is nearly over, macroeconomics is coming back into play. Investors are eager to read the mind of Fed chairman Jerome Powell for future interest rate cut decisions and the crystal ball to see what way the economy is heading.
On this front, investment bank Morgan Stanley has been churning out quite a lot of reports to guide investors. One such report came out in July and shared the bank’s key themes to focus on during the month. While July is over, this report contains key details that can provide information about what to expect for the rest of the year too. Two of the biggest takeaways from this report cover an economic soft landing and the potential for equities performance to widen.
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On the former front, the bank shared that July “bolstered the case for a soft landing as inflation has declined and a few major central banks cut rates.” It believes that forward looking data suggests that “wage growth should continue to slow in the U.S. and Eurozone” which will eventually contribute to cooling inflation and eventually lower rates to increase the chances of a soft landing. In terms of data, the bank’s estimates for 2025 suggest that year over year wage growth could sit at 3% in 2025 for a marked growth over the 2022 peak.
Back then, wage growth percentages as indicated by Indeed postings and the Fed had stood at ~9.4% and ~6.5%, respectively. As an additional positive note, the bank also adds that the US is leading the EU and the UK because of its wage growth of 3% which is less than half of the UK’s roughly 7%.
On the latter front, i.e., MS’ belief that equities performance can widen, it shares that there “is ample room for equities performance to broaden, but this requires a cyclical recovery.” What this means is that big tech has accounted for most of the market’s returns this year due to the AI hype, and this can spread out to smaller firms but only if the broader economy recovers. Underlying this belief is data for the flagship S&P index’s price to earnings ratio, as the bank shares that the 12 month forward P/E “runs at 21x on a cap-weighted basis but only 16x equal- weighted.” This suggests that the smaller companies have room to catch up with the larger companies, but their performance will only improve if consumer and business spending flourishes during a cyclical uptrend.
This potential has led the bank to lament that “we turned neutral too soon” as it also cites forward earnings data to support the hypothesis of the bifurcation in valuation. For the Magnificent Seven stocks, the 12 month forward earnings rebased to 100 as of December 2023 sit at a whopping 120 while the estimate for the remaining 493 firms on the S&P index is ~106. However, before you get too optimistic, MS also cautions against investing in small cap stocks. It shares that small cap “requires economic growth acceleration with lower interest rates, which seems unlikely in the current inflation environment.” Plotting the returns of small caps with bond yields to signify a relationship with interest rates, its data shows that when bond yields were at 1%, small cap relative returns to large caps were 100%. But when the yields soared to ~5.6%, these returns dropped to ~82%.
MS’ August report builds on the July themes. It builds on the bearishness surrounding small caps, shifts the focus on the labor market over inflation, and brings real estate into the mix. Reducing wage growth allows the Fed to shift its focus from inflation “to potential cracks in the labor market,” says the bank, but it cautions that recession “indicators such as the Sahm Rule are creeping toward a recessionary threshold based on the rising national unemployment rate.” Its data shows that the 3 month national unemployment average is 0.5% over the previous 12 month low, which rings a warning bell, to say the least. Still bearish on small caps, it adds that while “recent inflation data and the resulting decline in rates was a lift to small cap, softer economic data may constrain its continued outperformance.”
There is some positivity in the August report, though. The bank shares that commercial real estate, which has been one of the hardest hit sectors from rising rates and shifting trends to remote working, now presents an “emerging opportunity set.” The analysts outline that commercial real estate valuations “valuations have become more attractive in the face of higher interest rates and elevated supply,” adding that they “expect volumes to pick up this year due to upcoming debt maturities, reinforcing these lower entry points.” Counterintuitively, this optimism is based on depressed valuations as it uses the commercial real estate cap rate. As per MS’ data, this rate sat at 9% in March 2024, for nearly a two percentage point lead over retail real estate and a wider three point lead over residential real estate. The bank is also quite impressed with hedge fund performance in 2024 as it commented that the funds “delivered attractive risk-adjusted performance in the first half of 2024 and their positioning suggests confidence in the opportunities for skill-based returns.”
So, as MS takes a deep look at the economy, we decided to look at its conviction stock picks. Read below to find out what stocks it has absolute faith in.
Photo by Christian Wiediger on Unsplash
Our Methodology
To make our list of MS’ top stocks, we used its latest 20 top conviction stock ideas and ranked them by the average percentage share price upside to the bank’s own share price targets.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
20. UnitedHealth Group Incorporated (NYSE:UNH)
Share Price Upside: 6%
Number of Hedge Fund Investors In Q2 2024: 114
UnitedHealth Group Incorporated (NYSE:UNH) is one of the largest healthcare coverage providers in America. Morningstar’s data shows that the firm serves the needs of more than 50 million people, which offers it stability even during economic downturns. Key to UnitedHealth Group Incorporated (NYSE:UNH)’s future is an aging global population which should only increase the demand for its services. Additionally, revolutionary new drugs such as GLP weight loss medicine or cancer treatments are often quite expensive and require additional coverage, which opens up new and lucrative markets for UnitedHealth Group Incorporated (NYSE:UNH). The firm’s Optum business serves an additional 104 million customers, and it further increases the firm’s penetration in the $5 trillion US healthcare services market. At the same time, the firm’s size means that it is always the target of nefarious actors, as was evidenced earlier this year when UnitedHealth Group Incorporated (NYSE:UNH) suffered from cyberattacks.
UnitedHealth Group Incorporated (NYSE:UNH)’s management believes that it is well positioned for strong performance in 2025. During the Q2 2024 earnings call, it shared:
“We’re also well positioned for growth in 2025. In the selling season to date, the most sophisticated thoughtful buyers of health benefits and services in the US, such as large employers, unions, states, seniors, all continue to choose the offerings of UnitedHealth Group, when they’re looking for managed care, pharmacy services or a Medicare Advantage plan that provides the best value. This consistent growth reflects customers’ recognition of the need for a company like ours. As you know, UnitedHealth Group strives to help reduce the fragmentation and lack of coordination that drives up costs and erodes care outcomes in the $5 trillion US healthcare marketplace. We aim to better coordinate and align incentives among caregivers, payers, and pharmacy, enabling us to focus on the whole patient throughout their health journey.
We believe this increases value for customers and consumers, improves people’s experience and health, reduces redundancies and waste, and ultimately leads to a more sustainable health system. For example, the proven health and economic value to consumers and taxpayers of Medicare Advantage. A recent study by Milliman found that the cost of taxpayers of Medicare Advantage is 4% less than traditional fee-for-service Medicare. At the same time, Medicare Advantage provides seniors well over $2,000 per year in additional value through lower out-of-pocket cost and important services like dental, vision and hearing, none of which fee-for-service Medicare covers. That means a lot to the majority of the people Medicare Advantage serves, who have limited economic resources and otherwise would lack access to such services.”
19. Natera, Inc. (NASDAQ:NTRA)
Share Price Upside: 6%
Number of Hedge Fund Investors In Q2 2024: 60
Natera, Inc. (NASDAQ:NTRA) is a healthcare company that provides diagnostic services such as fetus screenings, organ rejection, cancer detection, and more. The firm is uniquely placed in a tangential position to the growing biotechnology market which is developing a plethora of treatments for cancer. This is because Natera, Inc. (NASDAQ:NTRA) provides blood tests that enable physicians to determine if their treatments have completely eliminated cancer from the body. These products are among the few of their kind in the industry, which has allowed Natera, Inc. (NASDAQ:NTRA) to rapidly gain market share and provided it with an early mover advantage. As of Q2, more than 40% of all oncologists in America order a cancer screening from Natera, Inc. (NASDAQ:NTRA), and this percentage can grow in the future if the firm expands the type of cancers the screening covers. On this front, Natera, Inc. (NASDAQ:NTRA) is running trials to see if its screenings work with gastric cancer and colorectal cancer. The screening product, called Signatera, added 13,000 sequential units in Q2, which was 63% higher than Natera, Inc. (NASDAQ:NTRA)’s baseline of 8,000. During the call, management shared that moving forward, the screening could add between 8,000 to 10,000 units.
Baron Funds mentioned Natera, Inc. (NASDAQ:NTRA) in its Q1 2024 investor letter. Here is what the firm said:
“Natera’s stock was bolstered by significant momentum in the oncology market, where its personalized blood-based DNA test Signatera is driving strong testing volume growth. The test detects and quantifies how much residual cancer DNA remains in the body after surgery. Signatera helps physicians determine whether chemotherapy is necessary after surgery and monitor for cancer recurrence before the cancer is detectable with standard imaging. We think Natera has a long runway for growth with expanding margins and profitability.
18. PepsiCo, Inc. (NASDAQ:PEP)
Share Price Upside: 7%
Number of Hedge Fund Investors In Q2 2024: 65
PepsiCo, Inc. (NASDAQ:PEP) is one of the biggest carbonated beverage providers in the world. This provides it with key advantages in the global beverage industry, which come in the form of well oiled supply chains, low costs through economies of scale, brand recognition to drive product sales, and financial resources in the form of $10 billion in cash to invest in new products. At the same time, these advantages also mean that PepsiCo, Inc. (NASDAQ:PEP) has to manage its costs and growth to satisfy investors. Over the past couple of years, it has grown revenue by 30% between 2020 and 2023 on an absolute basis as high inflation allowed it to raise prices. This growth has been accompanied by a roughly 26% share price growth over the same time period. Moving forward, as prices come down, PepsiCo, Inc. (NASDAQ:PEP) might find it difficult to sustain this revenue growth. As a result, one key factor driving its hypothesis is margins, as the firm tries to keep prices sticky and lower costs to increase shareholder returns.
Artisan Partners mentioned PepsiCo, Inc. (NASDAQ:PEP) in its Q1 2024 investor letter. Here is what the firm said:
“In the demographics/consumer trends theme, slowing sales volumes led us to focus more on services versus goods. As an example, we sold our position in food and beverage leader PepsiCo given slowing growth in its underperforming core beverage business, one which generates about 60% of revenues. Adding to the uncertainty of growth prospects beverages, PepsiCo was forced by local lawmakers and industry wholesalers to shift to a new distribution model during the rollout of Hard Mtn Dew, a new line of drinks that combines Mountain Dew with malt liquor.”
17. Thermo Fisher Scientific Inc. (NYSE:TMO)
Share Price Upside: 8%
Number of Hedge Fund Investors In Q2 2024: 108
Thermo Fisher Scientific Inc. (NYSE:TMO) is one of the biggest medical raw materials and equipment providers for the diagnostics and research industry. Since the start of 2022, its shares have lost 22%, which has been unsurprising given the impact of the coronavirus pandemic on the healthcare industry. Diagnostic services providers such as Thermo Fisher Scientific Inc. (NYSE:TMO) boomed during the pandemic as their products were widely demanded to help diagnose the virus. After the virus cases dropped, naturally their revenues also dropped and this was reflected in the share price. However, Thermo Fisher Scientific Inc. (NYSE:TMO) has moved forward, and as of 2023, 60% of its revenue came from the pharma industry. Its stature in the industry generates trust, which is key for healthcare companies, and during the pandemic, Thermo Fisher Scientific Inc. (NYSE:TMO) was Moderna’s partner for its COVID 19 vaccine. Sizeable resources, such as $8 billion in cash also mean that the firm can continuously innovate, and these days, the firm is focusing on the proteonomics market by announcing new products.
Thermo Fisher Scientific Inc. (NYSE:TMO)’s management shared details for these products during its Q2 2024 earnings call:
“I’ll begin with the new technologies we launched at the American Society for Mass Spectrometry Conference, further strengthening our industry leading position in analytical instruments. At the conference, we introduced the Thermo Scientific Stellar Mass Spectrometer, which extends our leadership in proteomics. The Thermo Scientific Stellar is used to validate biomarker candidates. It offers unprecedented analytical capabilities for targeted quantitation, enabling the insights needed by researchers to advance their work.
It’s a perfect complement to our groundbreaking Thermo Scientific Orbitrap Astral, used for protein discovery that we launched last year. It was incredibly exciting to hear the customer testimonials sharing the power of the Orbitrap Astral. To-date, we’ve had more than 40 publications that incorporated the impact of this breakthrough, and we’re really just getting started. Also at ASMS, we launched three new build-for-purpose editions of the Thermo Scientific Orbitrap Ascend Tribrid Mass Spectrometer tailored to specific applications for MultiOmics, Structural Biology and BioPharma. These instruments continue to elevate our industry-leading Thermo Scientific Orbitrap portfolio by offering enhanced speed and sensitivity to detect and characterize the most difficult protein samples, including complex biologics.”
16. Colgate-Palmolive Company (NYSE:CL)
Share Price Upside: 9%
Number of Hedge Fund Investors In Q2 2024: 52
Colgate-Palmolive Company (NYSE:CL) is a globally sold personal care and grooming brand, known for its toothpaste, toothbrushes, and other products. A leading player in particularly the toothpaste market, the firm commanded 41% of this market in mid 2023. The dominant position allows Colgate-Palmolive Company (NYSE:CL) to grow by raising prices in an inflationary market or maintaining revenue even when the economy is struggling due to the essential nature of its products. Colgate-Palmolive Company (NYSE:CL) also maintains key advantages over rivals through effective cost controls. Its trailing twelve month gross margins are 59.7%, which marks a nine percentage point lead over its closest rival P&G despite the fact that P&G’s revenue of $84 billion is significantly higher than Colgate-Palmolive Company (NYSE:CL)’s TTM figures of $19.9 billion. Along with margins, the key to Colgate-Palmolive Company (NYSE:CL)’s hypothesis are its ability to grow organically by increasing volumes and targeting emerging markets such as Latin America. At the same time, foreign markets also leave it vulnerable to a stronger US dollar that impacts revenue.
ClearBridge Investments mentioned Colgate-Palmolive Company (NYSE:CL) in its Q2 2024 investor letter. Here is what the firm said:
“Colgate-Palmolive, added to the portfolio in 2023, started outperforming materially toward the tail end of last year as growth, margin and market share momentum began to turn favorably, and that momentum has continued year to date as the stock has nicely outperformed the large cap staples group. The fundamental upside has been driven by a combination of healthy organic growth (with positive volumes), good gross margin progression, and strong re-investment spending supporting market share gains and future growth.”
15. Cummins Inc. (NYSE:CMI)
Share Price Upside: 13%
Number of Hedge Fund Investors In Q2 2024: 38
Cummins Inc. (NYSE:CMI) is a diversified industrial products company that sells engines, filters, generators, and other associated products. It is also a key player in the alternative fuel engine industry, as it develops engines that are capable of running on natural gas, hydrogen, and clean diesel. Cummins Inc. (NYSE:CMI)’s experience in the industry, as it has been operating since 1919 and its considerable financial resources, as evidenced by $2.7 billion in cash place it in a favorable position to capture the heavy transportation industry’s shift to clean energy. This is important since the Environmental Protection Agency (EPA) revised its emissions rules for truck engines in March 2024, which could open up the market for Cummins Inc. (NYSE:CMI)’s clean engine business. At the same time, the industrial focus of its products means that the firm is vulnerable to economic headwinds, and the key to understanding its business is the order backlog which provides future revenue visibility.
Cummins Inc. (NYSE:CMI)’s management commented on its other clean energy initiatives during the Q2 2024 earnings call:
“Also this quarter, we further progressed our partnership with Daimler Trucks and buses and PACCAR as we completed the formation of joint venture now known as Amplify Cell Technologies, to localize battery cell production in the in the battery supply chain the United States. This included naming the Chief Executive Officer of joint venture and breaking ground at a new manufacturing plant in Marshall County, Mississippi. Amplify Cell Technologies will enable Accelera by Cummins and our partners to advance battery cells focused on commercial and industrial applications in North America and serve our customers’ evolving needs.
This is a significant step forward as we continue leading our industry into the next era of smarter, cleaner power. And in July, Accelera was awarded $75 million from the Department of Energy to convert approximately 360,000 square feet of existing manufacturing space at our Columbus, Indiana engine plant for zero emissions components, including battery packs and electric powertrain systems. The $75 million grant is the largest federal grant ever awarded solely to Cummins and as part of the appropriations related to the inflation Reduction Act. The Columbus engine plant is also where we manufacture blocks and heads for our current and next-generation engine-based solutions, further showcasing our Destination Zero strategy in action. Now, I will comment on the overall company performance for the second quarter of 2024 and cover some of our key markets, starting with North America before moving on to our largest international markets.”
14. NVIDIA Corporation (NASDAQ:NVDA)
Share Price Upside: 16%
Number of Hedge Fund Investors In Q2 2024: 179
NVIDIA Corporation (NASDAQ:NVDA) is a GPU designer whose products cover enterprise and consumer use cases. Its largest business division is the data center business which designs and sells GPUs for artificial intelligence and other high performance computing workloads. NVIDIA Corporation (NASDAQ:NVDA)’s GPUs are the best performing in the industry, which means that it controls more than two thirds of the market. Access to leading edge chip manufacturing technologies and strict software control for customers of its GPUs through CUDA are key NVIDIA Corporation (NASDAQ:NVDA) competitive advantages. The firm’s dominant market position means that there is a shortage of its products, which has allowed NVIDIA Corporation (NASDAQ:NVDA) to beef up its margins by raising prices. However, it has also incentivized competing products from the likes of AMD and Intel, and the firm could see its position weaken if Big Tech succeeds in making its own AI GPUs.
Artisan Partners mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q2 2024 investor letter. Here is what the firm said:
“NVIDIA’s year-to-date dollar value increase is $1.8 trillion. That’s equivalent to the 2023 increase in US GDP, which is, of course, representative of the collective economic efforts of about 330 million people. NVIDIA’s market cap is now $3 trillion. So is the GDP of France.
Does this make any sense? We wish that we could definitively say that it doesn’t, given that we don’t own NVIDIA. But the answer is more complicated. The growth in revenue and profits at NVIDIA has been stunning. In the calendar year 2020, its revenue was about $17 billion. Estimates for 2024 are around $120 billion. Operating profit is projected to reach about $80 billion in 2024 versus $4.5 billion in 2020. NVIDIA’s revenue essentially represents the capital spending of a small number of very profitable, very cash-rich technology companies buying up the processors necessary to power artificial intelligence (AI) software programs. It’s an AI landgrab. In order for NVIDIA to sustain these levels of revenue or grow them from here, these AI investments must start to generate an ROI for those splashing out $120 billion a year. And if not generating an ROI in the near term, those companies must at least see the prospect of an ROI, a clear sustainable competitive advantage or a moat of some kind.”
13. Spotify Technology S.A. (NYSE:SPOT)
Share Price Upside: 19%
Number of Hedge Fund Investors In Q2 2024: 88
Spotify Technology S.A. (NYSE:SPOT) is a popular audio streaming company headquartered in Luxembourg but with operations concentrated in the US. The firm’s success in leveraging the utility and popularity of the internet to provide users with audio content has allowed it to gain an early mover advantage in an industry favored by working populations. Spotify Technology S.A. (NYSE:SPOT) grew its net and premium users by 113 million and 31 million users in 2023, and it holds a 32% market share of the global music streaming market. The dominance is evident in Spotify Technology S.A. (NYSE:SPOT)’s revenue too, as between 2021 and 2023 it has grown its revenue from EUR9.6 billion to EUR13.2 billion. Data shows that the firm enjoys 600 million monthly active users, and key drivers of its hypothesis are further user growth, user retention, growth in paid users, and cost control to enable Spotify Technology S.A. (NYSE:SPOT) to turn a profit.
Artisan Partners mentioned Spotify Technology S.A. (NYSE:SPOT) in its Q2 2024 investor letter. Here is what the fund said:
“Spotify is a leading global audio streaming franchise with 600 million monthly active users. We believe its position in the supply chain is solid given a secular trend around the fragmentation of music as well as internal product and pricing initiatives. Shares rallied after the company reported strong earnings results, including 21% revenue growth. Importantly, the company also reported gross margins expanded to 27.6%, and we believe it can expand further due to likely price increases, potentially better terms with labels and further cost discipline.”
12. Hasbro, Inc. (NASDAQ:HAS)
Share Price Upside: 19%
Number of Hedge Fund Investors In Q2 2024: 27
Hasbro, Inc. (NASDAQ:HAS) is a mid sized American company which provides games and entertainment products for children. Some of its most popular products are well recognized brand names across America such as the Nerf gun, Monopoly, and Transformer toys. These provide Hasbro, Inc. (NASDAQ:HAS) with a distinct advantage over rivals and allow it to retain control of the market. However, the low barriers to entry to its industry due to low technical complexity means that Hasbro, Inc. (NASDAQ:HAS) has to keep releasing new products and developing new ideas if it’s to protect market share from competitors. Additionally, unlike diapers, toys are not an essential item which means that the firm is vulnerable to revenue drops in case the economy slows or enters into a recession. As the economy has been struggling over the past couple of years due to high inflation, Hasbro, Inc. (NASDAQ:HAS) has had to reduce its headcount to satiate investors but has struggled to translate the monetary benefits of the strategies to its bottom line.
ClearBridge Investments mentioned Hasbro, Inc. (NASDAQ:HAS) in its Q4 2023 investor letter. Here is what the firm said:
” Hasbro, which owns global entertainment brands such as Monopoly, My Little Pony and Nerf, has struggled over the past few quarters due to lackluster demand for toys and games in favor of other forms of digital entertainment. Persistent underperformance has undermined our optimism over the company’s legacy businesses, and ultimately led us to exit the stock.”
11. Eli Lilly and Company (NYSE:LLY)
Share Price Upside: 20%
Number of Hedge Fund Investors In Q2 2024: 100
Eli Lilly and Company (NYSE:LLY) is one of the biggest healthcare companies in the world. Since 2023 start, its shares have gained a whopping 162%, and at the back of these gains is Eli Lilly and Company (NYSE:LLY)’s weight loss drug Mounjaro. One of the leading weight loss treatments in the market, Mounjaro and GLP-1 offerings in general have benefited Eli Lilly and Company (NYSE:LLY) due to their ability to manage tangential problems such as preventing pre diabetics from becoming diabetics. Eli Lilly and Company (NYSE:LLY)’s balance sheet shows that it holds $2.9 billion in cash and equivalents which allows it significant room to not only scale up the production of key assets like Mounjaro but also invest in other drugs. These include Eli Lilly and Company (NYSE:LLY)’s medicine for immune system problems called Tartz, its breast cancer medicine Verzenio, and its diabetes drug Trulicity. As it stares down the barrel of generics making an entry into the weight loss market, Eli Lilly and Company (NYSE:LLY) is busy conducting phase three trials for a low cost weight loss drug called Orforglipron.
Baron Funds mentioned Eli Lilly and Company (NYSE:LLY) in its Q2 2024 investor letter. Here is what the firm said:
“Shares of global pharmaceutical company Eli Lilly and Company increased on continued investor enthusiasm around GLP-1 drugs for diabetes and obesity. We remain shareholders. Lilly’s Mounjaro/Zepbound not only offers superb blood sugar control for diabetics but can drive 20%-plus weight loss and likely improve cardiovascular outcomes in both diabetic and non-diabetic obese patients. Lilly is developing next generation drugs, including retatrutide, which drives approximately 25% weight loss, and orforglipron, a daily pill that produces approximately 15% weight loss. In the U.S. alone, there are 32 million Type 2 diabetics and an additional 105 million obese patients who we estimate would qualify for GLP-1 drugs. Although supply and access are limited near term, we think GLP-1 drugs will become standard of care for both diabetes and obesity and will become a $150 billion-plus category. We see Lilly setting a high efficacy bar and capturing significant long-term market share. We think the adoption of GLP-1s will drive Lilly to triple total revenue by 2030.”
10. Toast, Inc. (NYSE:TOST)
Share Price Upside: 21%
Number of Hedge Fund Investors In Q2 2024: 43
Toast, Inc. (NYSE:TOST) is a specialty payments company that caters to the needs of the hospitality industry. It is one of the few companies of its kind that offers payment solutions directly to the restaurant industry, which provides Toast, Inc. (NYSE:TOST) a wide competitive moat within its industry. By becoming highly specialized in its domain, the firm could build a considerable number of partnerships in the industry which make it the brand of choice for US restaurants. Estimates show that as of 2023 end, there were 749,404 restaurants in America, and as of Q2 2024, Toast, Inc. (NYSE:TOST) had 120,000 locations in its portfolio. Not only does this create a significant untapped TAM for the firm, but it also means that net restaurant additions per quarter are a key Toast, Inc. (NYSE:TOST) performance metric that’s based on its hypothesis. The firm can also benefit from expanding into other industries, such as groceries, which is key to allowing Toast, Inc. (NYSE:TOST) to overcome its biggest weakness which is the cyclical exposure of its business model.
Toast, Inc. (NYSE:TOST)’s management commented on its diversification plans during the Q2 2024 earnings call:
“We recently expanded our partnership with mussels pretzels by signing an extension for another 100 stores in addition to the 300 locations already on our platform. We continue to roll our Toast across a number of marquee brands, including wet soils and barbecue holdings, which are part of fast-growing MTY brands. And the improvements we have made to our platform, combined with our strong pipeline gives us confidence in steadily increasing enterprise penetration over time. As I mentioned in our Investor Day in May, the work we’ve put in over the past decade building on our platform has allowed us to enter new verticals, including grocery, convenience stores and bottle shops. There are 220,000 locations and 660 billion in spend in these markets alone in the U.S. And so far, we’ve booked 1,000 new customers.
We see a significant growth opportunity here, in part because so much of this market is still using legacy on-prem solutions and see the benefits of an integrated cloud platform. For example, Victory Hospitality Group in Portland, Maine, recently launched three markets on Toast in addition to their portfolio of award-winning restaurants that have been with us since 2016. Since adding Toast, the staff has been able to offer better service to their guests by making back-office tasks, including inventory management, much more streamlined. We see examples like this across many of our early retail customers and have confidence that we can drive significant growth in the segment.”
9. Comcast Corporation (NASDAQ:CMCSA)
Share Price Upside: 21%
Number of Hedge Fund Investors In Q2 2024: 61
Comcast Corporation (NASDAQ:CMCSA) is one of the biggest internet and media providers in America. Its size and scale are a double edge sword for the firm. While it allows Comcast Corporation (NASDAQ:CMCSA) to enjoy a sizeable market share that it can milk for more revenue especially as household internet use rises, new broadband technologies such as fixed wireless provide consumers with more convenient products. This has the potential to eat Comcast Corporation (NASDAQ:CMCSA)’s market share, and even if it manages to keep its share, it will struggle to add new subscribers to its brand. Similarly, Comcast Corporation (NASDAQ:CMCSA)’s feature films business faces stiff competition from digital streaming companies, and while the firm operates its own streaming service called Peacock, it is a late mover in the market which means that the service has been unable to establish a dominant position. Key drivers for Comcast Corporation (NASDAQ:CMCSA)’s hypothesis are its net subscriber additions, subscriber retention, overseas revenue growth through parks, its average revenue per user (ARPU), and the performance of its streaming service.
Comcast Corporation (NASDAQ:CMCSA)’s management shared key details of a deal that could drive customers to its streaming service during the Q2 2024 earnings call:
“Our expectation is that soon an 11-year rights deal between ourselves and the NBA will be announced. We don’t believe that the resolution of matching rights will affect the package that we expect to be awarded. This package, which begins with the 2025-2026 season includes: 100 NBA games each regular season across NBC and Peacock, which is more than any other media partner and more regular season games than each existing partner has under the current rights deal; for playoffs, we will have first and second round games each year, exclusively on our national platforms and six NBA conference final series over the course of the term of the deal, which is more playoff games on average each year, than any other media partner; and exclusively for Peacock will be approximately 50 national regular season and post-season games, including National Monday Night games and doubleheaders.
Additional elements of the NBA package include the annual NBA All-Star Game and All-Star Saturday Night each season, the season opening NBA tip-off doubleheader each season, a special doubleheader on the MLK holiday, and Select NBA games in every NBA All-Star game on Telemundo. Beyond the NBA itself, we’re excited that our package includes WNBA, where starting in the spring of 2026, we’ll have more than 50 WNBA regular season and first round playoff games each season across Peacock, NBC and USA, and we’ll also have games in seven WNBA Conference semifinals and three WNBA Final series; for USA Basketball, we’ll have the rights to USA men’s and women’s games leading up to the Olympics and FIBA World Cup; Sky Sports will air all of NBCUniversal’s NBA and WNBA games in its markets; and finally, Xfinity will be the NBA and WNBA’s marketing partner in the video category.”
8. Apple Inc. (NASDAQ:AAPL)
Share Price Upside: 21%
Number of Hedge Fund Investors In Q2 2024: 184
Apple Inc. (NASDAQ:AAPL) is the world’s largest technology company in terms of revenue and market capitalization. Its $3.4 trillion valuation is driven by Apple Inc. (NASDAQ:AAPL)’s bread and butter product, the iPhone, its tight ecosystem that drives complementary and other product sales, and technological and design strengths that focus on aesthetics as well as hardcore engineering such as semiconductor design. For the nine months ending in June, $155 billion of Apple Inc. (NASDAQ:AAPL)’s $296 billion in revenue was from iPhone sales. This makes the iPhone upgrade cycle a key tenet of Apple Inc. (NASDAQ:AAPL)’s hypothesis, as analysts and investors place their faith in strong product design and ecosystem capture making iPhone users stick with the lineup when they choose to upgrade. Another key pillar of the hypothesis is the Services business division which accounted for $72 billion of revenue during the nine month period. Apart from products such as the App Store, Services also include revenue from payments made by Google to Apple Inc. (NASDAQ:AAPL) to offer Google’s Search on its products, and anti trust action against Google or other legal actions could spell trouble.
Polen Capital mentioned Apple Inc. (NASDAQ:AAPL) in its Q2 2024 investor letter. Here is what it said:
“Apple re-emerged as a top performer in the second quarter. The company reported better-than-feared results in its iPhone segment that quelled concerns over weakness in China. Additionally, the company forecast a return to sales growth and announced a $110 billion stock buyback plan, the largest in U.S. history. Later in the period, at its Worldwide Developers Conference, Apple introduced long-awaited new AI features that spurred some optimism around an upgrade cycle for the iPhone and, more generally, the important role Apple may be able to play in the emerging AI landscape. We continue to study Apple closely, which we previously owned the company for many years during its growth phase, to determine if it is poised for another significant revenue and earnings growth period.”
7. Nasdaq, Inc. (NASDAQ:NDAQ)
Share Price Upside: 22%
Number of Hedge Fund Investors In Q2 2024: 37
Nasdaq, Inc. (NASDAQ:NDAQ) is one of the biggest financial markets and associated services providers in the world. Apart from the well known NASDAQ exchange, it also operates and provides money laundering detection and risk management platforms. The fact that the NASDAQ exchange is the second largest stock exchange in the world in terms of market cap, and it houses all of the biggest technology companies provides Nasdaq, Inc. (NASDAQ:NDAQ) with a wide competitive moat that is unlikely to go anywhere if the exchange listing model remains in its current form. Similarly, money laundering detection and associated financial technology services stand to benefit from the growth in AI use cases as well as growing digitization in the world to help Nasdaq, Inc. (NASDAQ:NDAQ) diversify its business to an extent. In fact, during Q2 2024, Nasdaq, Inc. (NASDAQ:NDAQ)’s revenue was $1.1 billion, out of which 78% or $901 million was from its non exchange business. This means that as capital markets struggle in tough rate environments, Nasdaq, Inc. (NASDAQ:NDAQ) can benefit from non related revenue but the firm still remains vulnerable to the broader economy and particularly its impact on business spending.
Oakmark Funds mentioned Nasdaq, Inc. (NASDAQ:NDAQ) in its Q2 2024 investor letter. Here is what the fund said:
“Nasdaq is a global technology company that pro- vides platforms and services for capital markets and other industries. Over the past decade, under the leadership of CEO Adena Friedman, Nasdaq has transformed from a traditional equity exchange into a collection of fast-growing, high-quality software and data businesses with the majority of revenue coming from non-exchange segments. Nasdaq’s recent acquisition of Adenza led some investors to question management’s capital allocation disci- pline. However, we believe the subsequent share price reaction more than compensates for the risk that Nasdaq overpaid for Adenza. More importantly, the experience seems to have catalyzed a renewed focus on organic growth, debt pay- down, and capital return. Despite Nasdaq’s poten- tial for faster than average growth, high mix of recurring revenue, and impressive operating margins, the stock trades at a P/E multiple in line with the broader market. We were pleased to purchase shares in this excellent business for an average price.”
6. FTAI Aviation Ltd. (NASDAQ:FTAI)
Share Price Upside: 23%
Number of Hedge Fund Investors In Q2 2024: 33
FTAI Aviation Ltd. (NASDAQ:FTAI) is a New York based firm that leases aircraft and makes and sells aircraft engines. This exposes it to the highly growing commercial travel industry which is expected to benefit as a wider percentage of global populations experience a rise in their living standards and start relying on air travel. A key differentiator for FTAI Aviation Ltd. (NASDAQ:FTAI), which could serve it well in the future is its Module Factory. Given that 2024 has been marked by Boeing’s troubles in the commercial aviation industry that has reduced the supply of jets worldwide, FTAI Aviation Ltd. (NASDAQ:FTAI) could benefit from this as airlines are forced to stretch their existing fleet for longer than they had originally planned. The firm can expand its support for additional engines in the future to further widen its moat and add more engine manufacturers to its list of supported firms to gain global market share. Moving forward, FTAI Aviation Ltd. (NASDAQ:FTAI) will have to ensure it develops strong industrial relationships and innovative factory processes to ensure it doesn’t bleed market share to competitors.
FTAI Aviation Ltd. (NASDAQ:FTAI)’s management commented on its refurbishment market during the Q2 2024 earnings call:
“Turn times at maintenance shops are getting longer. So that means it puts a premium on having a pre-built engine or module available. So we can actually get higher — slightly higher prices and still generate significant savings for the customers. At the same time, by controlling costs through our own facilities, we do that with controlling the labor cost and that we have more specialization in the facilities.
We’re basically running on engine and we’re teaching people to do it in a high volume manner. So it’s a learning curve process where you get better and better at it is you do it more and more frequently, so that’s part of it. And we’re also getting smarter about used serviceable material, forecasting the demand. Where is it going to be needed, when are we going to need it, getting our repairs done in advance. So we’re using — we’re smarter and more efficient about using used materials. So it’s really on both sides of the equation, revenue is up, expenses down that we see growing margins. We will also see increased savings when we close on Lockheed Martin. And so we do see the margins trending towards 40%, and we think that, that will continue to grow as we get better and more experience with that facility as well, and we generate more volume.
So a pretty positive outlook for today and also for the near future for the coming years. I would say on your other question on Pratt versus CFM, we have said that the Pratt & Whitney V2500 deal will not be dilutive to margins, and I would continue to say that. We’re seeing very good demand for those engines, extremely high. And we’re also seeing good turnaround times on getting engines through the shop. So we continue to expect that, that will be the same or as good as or better than the CFM side.”
5. M&T Bank Corporation (NYSE:MTB)
Share Price Upside: 35%
Number of Hedge Fund Investors In Q2 2024: 34
M&T Bank Corporation (NYSE:MTB) is a New York based bank that provides services to retail, commercial, and institutional customers. Since it’s a bank, M&T Bank Corporation (NYSE:MTB) has to compete on the basis of its deposit costs, loan and asset portfolios, interest income, and geographical presence. The bank benefits from its fortress of a balance sheet, which had a whopping $208 billion in total assets as of December 2023. The high interest rate environment that has affected markets and the broader business environment has proven to be a boon for M&T Bank Corporation (NYSE:MTB). Its revenue grew from $5.9 billion to $9.3 billion between 2020 and 2023 to mark a strong 57% growth. The bank also benefits from a diversified loan portfolio as its presence in the consumer and industrial sectors reduces the risk that it faces from the struggling commercial real estate sector. M&T Bank Corporation (NYSE:MTB)’s CRE loans sat at $31.5 billion in Q2 after a 4% drop as a result of management efforts to reduce exposure.
M&T Bank Corporation (NYSE:MTB)’s management shared key CRE details during the Q2 2024 earnings call:
“We continue to manage our CRE concentration, with CRE as a percent of Tier 1 capital and allowance of 151% as of the end of the second quarter. Asset quality continues to improve with declines in non-accrual and criticized loans and net charge-offs in-line with expectations we laid out in the first quarter. M&T’s preliminary stress capital buffer declined 20 basis points to 3.8%, reflecting many of the factors just mentioned. Given the improvements in these factors, we plan to begin our share repurchase in the third quarter at a pace of $200 million per quarter through the end of the year. We expect to maintain our capital ratios at least at the current levels for the remainder of the year. We will continue to monitor the previously discussed factors as well as the revised Basel III proposal once made public and will adjust our capital return plans if necessary.”
4. DraftKings Inc. (NASDAQ:DKNG)
Share Price Upside: 38%
Number of Hedge Fund Investors In Q2 2024: 96
DraftKings Inc. (NASDAQ:DKNG) is a sports betting company that allows users to play online. As per boutique firm EKG, the firm held a market share of 32% in 2024, which made it the second biggest company in the online betting market after Flutter Entertainment owned FanDuel which held a 35% market share. The two have reaped the benefits of being early movers in a market at a time when online betting regulation was not left up to the states. Given that the third largest online betting service, MGM’s BetMGM, holds an 11% market share, DraftKings Inc. (NASDAQ:DKNG) can enjoy a wide moat in a high margin margin for years to come provided it does not lose market share to FanDuel. Estimates for the firm’s future revenue growth compared to its primary rival are robust, as DraftKings Inc. (NASDAQ:DKNG) is expected to grow revenue by 21% in 2025 which is quite higher than FanDuel’s 12%.
Baron Funds mentioned DraftKings Inc. (NASDAQ:DKNG) in its Q1 2024 investor letter. Here is what the firm said:
“Shares of DraftKings Inc., a leading online sportsbook in the U.S., rose during the quarter following an earnings release that showed strong market share gains and an improved outlook for future profitability. Market share capture has been driven by investment in innovative product offerings that are resulting in strong customer retention. The company also announced the acquisition of JackPocket, a digital lottery courier service. We believe the acquisition will help DraftKings achieve a first-mover advantage in many states that offer the JackPocket service but have not yet legalized online sports betting and casino gaming. DraftKings is well positioned to expand margins and generate positive free cash flow as it grows revenues alongside the rapidly expanding U.S. sports betting market, in our view.”
3. Tesla, Inc. (NASDAQ:TSLA)
Share Price Upside: 43%
Number of Hedge Fund Investors In Q2 2024: 85
Tesla, Inc. (NASDAQ:TSLA) is the biggest pure play electric vehicle manufacturer in the world. Along with making EVs, it also has a energy storage business and generates additional income by selling regulatory credits. Tesla, Inc. (NASDAQ:TSLA) has a wide moat because of its manufacturing model which has stood the test of time and allowed it to churn out a whopping 1.85 million EVs in 2023. At the same time, its energy storage business has surprised investors in 2024 with strong growth. During Q2, Tesla, Inc. (NASDAQ:TSLA)’s energy storage revenue doubled to sit at $3 billion. This came at a time when its EV sales struggled in a high interest rate environment. Yet, EVs are key to Tesla, Inc. (NASDAQ:TSLA)’s hypothesis, since they account for 84% of its revenue. This leaves the firm vulnerable to lithium supply as well as tough competition in fast growing markets such as China.
Tesla, Inc. (NASDAQ:TSLA)’s Elon Musk believes that there is huge potential in humanoid robots, though. Here’s what he said during the Q2 2024 earnings call:
“Yes, I mean, as I’ve said a few times, I think the long-term value of Optimus will exceed that of everything else that Tesla combined. So, it’s simply — just simply consider the usefulness utility of a humanoid robot that can do pretty much anything you ask of it. I think everyone on earth is going to want one. There’s 8 billion people on earth, so it’s 8 billion right there. Then you’ve got, all of the industrial uses, which is probably at least as much, if not way more. So I suspect that the long-term demand for general purpose humanoid robots is in excess of 20 billion units. And Tesla is — that has the most advanced humanoid robot in the world, and is also very good at manufacturing, which these other companies are not.
And we’ve got a lot of experience — with the most experienced with the world leaders in real world AI. So we have all of the ingredients. I think we are unique in having all of the ingredients necessary for large scale, high utility, generalized humanoid robots. That’s why my rough estimate long-term is in accordance with the ARK [ph] Invest analysis of market cap on the order of $5 trillion for — maybe more for autonomous transport, and it’s several times that number for general purpose humanoid robots. I mean, at that point, I’m not sure what money even means, but in the benign AI scenario, we are headed for an age of abundance where there is no shortage of goods and services. Anyone can have pretty much anything they want. It’s a wild — very wild future we’re heading for.”
2. Schlumberger Limited (NYSE:SLB)
Share Price Upside: 45%
Number of Hedge Fund Investors In Q2 2024: 67
Schlumberger Limited (NYSE:SLB) is the biggest oilfield services provider in the world. This allows it to generate substantial revenues, and the industrial nature of its business means that future cash flows and revenues are visible through its order pipeline and backlog. Additionally, Schlumberger Limited (NYSE:SLB)’s competitive position is bolstered by the fact that it counts some of the biggest oil companies in the world such as Petrobras and Saudi Aramco as its customers. Schlumberger Limited (NYSE:SLB) however remains vulnerable to dropping production activities, especially like the one the oil industry has risked recently due to weak Chinese economic growth depressing the oil market. However, the firm’s $3.9 billion in cash and equivalents and trailing twelve month free cash flow of $4.3 billion provide it with ample room to keep investors happy during downturns by conducting share buybacks and dividend payouts.
Artisan Partners mentioned Schlumberger Limited (NYSE:SLB) in its Q4 2023 investor letter. Here is what the firm said:
“We have stringent criteria for business quality, which is particularly important in commodities sectors as these businesses do not control the underlying commodity prices, which can be volatile. We expect Schlumberger to continue to successfully navigate market volatility and deliver on its free cash flow and profit margin growth objectives from combination of activity growth and pricing gains. The stock has been among our top contributors since we initiated our position in December 2020.”
1. LifeStance Health Group, Inc. (NASDAQ:LFST)
Share Price Upside: 77%
Number of Hedge Fund Investors In Q2 2024: 14
LifeStance Health Group, Inc. (NASDAQ:LFST) is an Arizona based company that provides mental health care services. The firm has yet to turn a profit over the last four years, but its revenue has grown rapidly since 2019. LifeStance Health Group, Inc. (NASDAQ:LFST)’s revenue was $212 million in 2019 and it sat at $1 billion in 2023 to mark a 372% growth. This is unmatched across most firms, and comes close to AI giant NVIDIA’s revenue growth over recent years. However, since it is unprofitable, cost control is a key tenet for LifeStance Health Group, Inc. (NASDAQ:LFST)’s hypothesis. Additionally, investors should also be on the watch out for visit volumes and total revenue per visit coupled with the number of doctors that it can bring under its brand. These metrics signal LifeStance Health Group, Inc. (NASDAQ:LFST)’s market share capture and operating efficiencies.
However, LifeStance Health Group, Inc. (NASDAQ:LFST) has to be on its toes for competition especially since technology barriers to entry are low. Here’s what management had to say on this front during the Q2 2024 earnings call:
“I think there’s been, from a competitive standpoint, some movement back toward in-person visits. We saw this quarter about a 1.5% bump toward in-person versus virtual. And in terms of the competitive environment, obviously, the — there’s still a great demand for mental health clinicians, but we will continue to work on both, bringing in the right clinicians through the front door and trying to mitigate the outflow on the back door. And our — to that point, our retention has stabilized. It’s slightly better than where it was last year, but it’s not where we want it to be. So we will continue to work on that.”
LFST tops Morgan Stanley’s conviction stocks when it comes to analyst upside. But our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LFST but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
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