Morgan Stanley gives its favorite buy and sell picks into earnings reports

A highly anticipated corporate earnings season has just kicked off, and Morgan Stanley has highlighted which stocks to buy — or avoid. Goldman Sachs and Johnson & Johnson posted better-than-expected earnings Tuesday, adding to Monday’s beats from Bank of New York Mellon and Bank of America . Those stronger-than-forecast numbers come as expectations for third-quarter results have tumbled. Morgan Stanley’s Michelle Weaver noted that overall expectations for S & P 500 earnings are down 8% from their April peak. Excluding energy, expectations are down 11%. “This earnings season in particular holds importance as it could shape the debate between the bulls and the bears,” Weaver wrote. “A sharp reduction in earnings estimates could signal significant earnings cuts and a potential earnings recession.” “On the other hand, more resilient 3Q numbers and stable guidance could suggest a more moderate earnings correction or at least push the earnings debate until January’s fourth quarter reporting season,” she said. Given this backdrop, Morgan Stanley analysts looked for stocks that could experience big swings based on near-term catalysts, some positive and others negative. Here are some of those names. Morgan Stanley sees upside for Arcutis Biotherapeutics if the biotech company’s two phase-two studies for its drug Zoryve are successful. The medicine is already used for psoriasis and is now being evaluated for use in atopic dermatitis. Results are expected by year-end. “We would expect significant investor focus on these data sets, and our statistical analysis suggests a high probability-of-success (POS) for both trials,” wrote Morgan Stanley analyst Vikram Purohit. Third-quarter earnings are in focus for Cummins . Morgan Stanley analyst Dillon Cumming anticipates that accelerating price/cost tailwinds and supply chain normalization, as well as a supportive Class 8 build and order commentary, will catalyze an earnings beat in the third quarter. Than, in turn, should translate to higher earnings-per-share estimates for 2023, he said. Another name that should see a positive turn is Patterson-UTI Energy , according to analyst Connor Lynagh. He expects in-line third-quarter results and fourth-quarter guidance. However, he sees higher 2023 EBITA and free-cash flow revision potential for the company versus its peers. Lynagh also expects commentary around drilling and fracking market pricing and activity trends that will be more upbeat than expectations. “Additionally, we could see scope for early indications of PTEN’s 2023 capital allocation framework, including potential for incremental shareholder returns, which would be received favorably by the market, in our view,” he wrote. Meanwhile, Logitech is one of the stocks Morgan Stanley expects to decline due to negative earnings. The company guided down for fiscal year 2023 revenue growth last year, but analyst Erik Woodring doesn’t think the company didn’t take into account the continued deterioration of consumer PC demand in the last 90 days. “We believe Dec Q/FY23 estimates need to be revised down further, and now model Dec Q revenue 8% below consensus,” he wrote. Woodring also anticipates fiscal-year revenue growth will decline 10% year over year. Another name that could get hit is semiconductor company Micron Technology , thanks to investors underestimating the severity of the current memory declines. Analyst Joe Moore expects customer and competitor reports to show exceptionally high inventories. — CNBC’s Michael Bloom contributing reporting.

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