Ten U.S. stocks that will hold up well in a bear market

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Reading through research notes from Wall Street, you would be forgiven if visions of the running of the bulls in Pamplona danced through your head.

After the Nasdaq & S&P 500 set all-time highs to end last week, strategists are sounding a bullish refrain: The rally in U.S. equities has more room to run.

Adam Parker, chief U.S. equity strategist at Morgan Stanley, stated it as bluntly as possible: "We like U.S. stocks, right here right now," he wrote. "Our long-term thesis has been that we are in the middle of the longest expansion ever."

The strategist's call is predicated on the notion that 2015 will be a replay of 2014, with a shaky first quarter followed by a stretch of robust growth. The massive contraction in core durable goods orders in March provides cause to wonder whether capital spending will rebound as sharply as hoped, but Mr. Parker's bullish thesis does not rest upon that sole tenet.

He is also more constructive on profit growth than consensus, and notes that valuations have tended to rise in tandem with upward revisions to earnings.

A key rationale for Mr. Parker's optimism is grounded in his view that while margins look stretched from a historical standpoint, they will not imminently revert to their long-term average, as some have argued.

"The number of businesses that have higher margins, lower capital intensity and superior profit structures has dramatically grown," the strategist said. "Our advice to those using valuation frameworks that assume margins mean revert to long-term averages is to avoid comparing apples to oranges."

As an example, he points to the share of S&P 500 companies that carry absolutely no inventory. Low inventory entails either non-physical products, which mean no storage or limited production costs, or elevated demand for those products, which suggests the company has a high degree of pricing power. Since 1980, this number has gone from 5 per cent of the index to more than 20 per cent.

Many of Mr. Parker's peers are also largely enthusiastic about the outlook for U.S. equities.

"Although valuations are a bit full, we believe that U.S. equities remain in bull-market mode, as both broad fundamentals and the economy continue to improve," said Oppenheimer chief market strategist John Stoltzfus, who has a year-end price target of 2,311 for the S&P 500. "We continue to recommend an overweight exposure to U.S. equities as the U.S. economy leads internationals in the recovery and as geopolitical tensions make headlines."

Even Deutsche Bank's David Bianco, who believes the risk of a near-term correction is elevated and that the next 5-per-cent move is likely to be to the downside, thinks investors still have to stay involved in the equity market. He sees only about 2 per cent of upside from current levels.

Last week, however, Bank of America chief investment strategist Michael Hartnett indicated that a bit of caution is in order, citing outflows from U.S. equity funds in nine of the past 10 weeks. "Correction risks will grow in the absence of fresh inflows in coming weeks," he warned.

Citigroup chief U.S. equity strategist Tobias Levkovich, on the other hand, thinks it is only a matter of time until investors flock to U.S. stocks once again.

"Europe and Japan are no longer that 'cheap' in relative terms and thus earnings growth may very well become the new differentiator and expectations are low in America," he said. "Our comfort with a second half 2015 turn rests on more jobs, better wages, lower oil price benefits (with their traditional 12-18 month lag effects), and signals for capex growth outside of the energy patch."

Just in case his call for a long-standing bull market is off the mark, Morgan Stanley's Mr. Parker offers a list of 10 stocks that are likely to beat low-yielding sovereign bonds even in the event of a bear market for equities, thanks to their below-average market multiple and long-term earnings growth potential.

Buying growth at a reasonable price will help investors avoid a possible one-two punch of lower-than-expected earnings and multiple contraction, said the strategist.

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Investor bear spray

Adam Parker, chief U.S. equity strategist at Morgan Stanley, offers a list of 10 stocks that are likely to beat low-yielding sovereign bonds even in the event of a bear market for equities, thanks to their below-average market multiple and long-term earnings growth potential.

Apple (AAPL)

Citigroup (C)

Gilead Sciences (GILD)

Union Pacific (UNP)

Actavis (ACT)

Twenty-First Century Fox (FOX.A)

Time Warner (TWX)

Ford Motor (F)

BlackRock (BLK)

Comcast (CMCSA)

Source: Morgan Stanley