Morgan Stanley screens say sell CRH, JD Wetherspoon and many others

10th Jun 2014 15:41

Morgan Stanley has put out a note compiling a list of stocks that its stock screens suggested were worthy of selling, including building materials group CRH and pub operator JD Wetherspoon. The note, entitled 'Stock screens suggest selling small caps', contains the latest in the broker's regular screens for potential sell ideas, to help investors find potential underperformers. "They are based on quantitative metrics only and should be used as a starting point for investors looking for potential sell ideas or underperformers," the broker stressed.Morgan Stanley's screen included one based on famous hedge fund manager Joel Greenblatt theories, which looks for companies showing low return on capital employed as well as high enterprise value-versus-earnings before interest, tax depreciation and amortisation (EV/EBITDA). Other screens include a 'Reverse Intelligent Investor' based on the teachings of investor Ben Graham, 'Hype Stocks Running Out of Steam', 'Intra-Sector Hype Stocks', 'Expensive Outperformers' and 'The 3 O's Screen: Over-loved, Over-owned and Overvalued'.Building materials group CRH appeared on three screens, as did JD Wetherspoon. 3i, Aviva, Barratt Developments, Dixons Retail, Drax, DS Smith, Greencore, Thomas Cook, Tui and Tullow Oil all appeared on two screens.The broker recently argued that now was the time to raise exposure to large-cap stocks, as they offer the best risk-reward across the market, in its opinion. "Consistent with our view that investors should prefer large caps over small and mid-caps, the average size of stocks appearing in two or more of our sell screens is at a record relative low." The average market cap of the companies that make multiple appearances in its screens is just 35% of the size of the average stock in the MSCI Europe index, "and these sorts of levels have often provided a strong signal to rotate out of small caps", it said. Over the last six years, the median stock on the 'Multiple Appearances' screen has had a cumulative return 21.7% below MSCI Europe, the broker pointed out. "Over the last year, results have been reasonable, with the median stock underperforming by a cumulative 3.2% in that time, and underperforming by 3.7% relative in the most recent quarter."Intra-Sector Hype Stocks has been the most effective screen in the last year, while the 3O's has been the most effective in the last quarter. The Hype Stocks Running Out of Steam screen included Rightmove, Telecom Plus, Supergroup, Domino's Pizza and Clarkson."These stocks are popular, expensive, have high expectations and have rallied recently, but also have weak earnings revision trends. All stocks meet at least four of the five hype criteria: in the top third of European stocks in terms of broker rating, six-month performance, price-to-earnings, price-to-book value and sales growth expectations," Morgan Stanley explained. "In addition, they have a negative and falling earnings revision ratio."Intra-Sector Hype Stocks looked for strong performers, high valuation, high expectations but weak revisions. These included Thomas Cook, Aviva and Workspace.OH