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Stocks are set for big swings this earnings season , and that spells opportunity for investors to buy and short some names, according to Morgan Stanley. Expectations for the latest quarterly reporting season have declined since the middle of 2022 — down nearly 13% from April, according to a Monday note. The firm is expecting strong fourth-quarter earnings from energy and industrials, but materials and communication services companies may post double-digit declines. More important for investors this earnings season will be the 2023 guidance, the firm said. Investors are focusing on margins as companies increasingly turn to cost-cutting measures including layoffs to navigate a challenging macro backdrop. Given this, traders should expect a rise in price dispersion over the next couple weeks as corporate earnings season unwinds. Seventy companies in the S & P 500 have released results so far this earnings season, according to FactSet data. Of those, about 69.6% have outpaced analyst estimates. “In our view, a key driver of this pick-up in dispersion will be the widening relative performance gap between those companies that are operationally efficient in this challenging macro environment, and those that are not,” the firm’s Michelle Weaver wrote. “In this sense, we think companies that minimize capex, inventory, and labor investment and maximize cash flow will be rewarded on a relative basis. The overarching story is that the market is pricing a tougher period from 4Q22 through 1H23 and then a rebound in 2H23,” Weaver continued. Morgan Stanley identified 10 stocks that its analysts expect will “react materially” to their quarterly results, or other immediate catalysts. Here are three positive names, and two negative, that Morgan Stanley highlighted: Bath & Body Works will react positively to earnings, according to Morgan Stanley. The beleaguered retail stock fell about 38% in 2022, but it has climbed more than 8% so far in 2023. Even so, Morgan Stanley expects as much as 11% upside to fourth-quarter earnings per share consensus expectations. “[While] specialty retail stocks have risen +2% on avg since the ICR conference, BBWI is -1%, indicating that this potential beat has not been priced in,” the note read. Morgan Stanley is also very positive on agricultural machinery stock CNH Industrial , saying there is more upside for the stock after the company issues a full-year forecast. Shares of CNH were down about 3% in 2022, and the stock has since advanced more than 6% since the start of 2023. “Expect 2023 guidance to drive upward estimate revisions (we are ~10% ahead of cons on EPS for both 4Q and 2023), with investors more willing to own CNHI relative to ag peers after modest underperformance in 2022,” read the note. “Listing consolidation from NY/Milan to NY a potential catalyst.” On the other hand, investors could short these names that could see their stock price trend lower after reporting results, according to Morgan Stanley. Snap will likely miss revenue expectations when it reports its results, the firm said. Any weak spots will likely add to the troubles the social media stock has already seen. Shares cratered roughly 80% last year. It’s up more than 13% in 2023. “We expect SNAP to miss 4Q revenue and guide 1Q below the Street (earnings on Jan 31),” the firm said. “We forecast 4Q revenue fell -2% Y/Y, with December declining -10% Y/Y.” Meanwhile, Morgan Stanley expects “disappointing results” from Bright Horizons Family Solutions , saying wages will weigh on margins from the employer-sponsored child care provider. “We will be skeptical if guidance is above low-double-digit revenue growth and AOI margins above 10,” read the note.
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