Morgan Stanley Says Buy These Stocks For A New Bull Market

If you invest in quality stocks, you’re probably always on the lookout for companies that generate a lot of profit relative to the size of their assets – and do that in a sustainable, expanding way. Luckily, researchers at Morgan Stanley may have just made your hunt a little easier – with their “30 for 2025” list of companies for longer-term investors.

What did it take to make the cut?

Now, there’s a laundry list of characteristics that your traditional “quality” investor will watch for, like pricing power, capital intensity (ongoing capital spending in relation to sales), management quality, and balance sheet strength. So Morgan Stanley came up with an 11-point checklist and scored 30 quality-oriented companies against each. I’ve analyzed the scores to find the top three. The stocks might surprise you…

Morgan Stanley’s magic matrix laid out 11 characteristics of a good “quality” stock and scored each one accordingly. The ones that scored best weren’t necessarily the ones you might think.

#1: Prologis (PLD)

Scoring the best of the lot was Prologis, a real estate investment trust (REIT) specializing in logistics. The firm owns and rents out giant distribution centers (DCs) to the world's leading logistics firms (think: DHL or Amazon). Morgan Stanley likes this stock for a couple of reasons. Firstly, the average length of a rental agreement for Prologis’s facilities is around seven years. Now, as you’ve undoubtedly noticed, there are vast amounts of things being delivered these days, and that’s boosted the rent that DC owners can charge. According to Prologis, rent for US and Canadian distribution and fulfillment centers leapt by a record 34% last year. Take a look at the chart below. It shows the market rental rate in US dollars per square foot for large facilities, going back to 2006.

Annual nominal and real (adjusted for inflation) net effective market rental rate for large facilities in US and Canada in dollars per square foot. Source: Prologis.

Now, as rental agreements come up for renewal, Prologis should be able to extract higher payments and more revenues over time.

Secondly, building monster DCs is an expensive and arduous task. There’s plenty of land in the US, but a good location is crucial. Big logistics firms squeeze every dime of efficiency from their networks, and the distance their trucks have to travel is a key aspect of that. And that means land is scarce in the best places for these colossal buildings. What’s more, the cost to put the things together has soared recently as commodity prices have climbed.

Adding these two together, Morgan Stanley thinks Prologis is in a great position: likely to benefit from a very favorable supply-and-demand imbalance, with plenty of room to jack up its rental prices.

#2: JPMorgan (JPM)

Now, you wouldn’t normally find banks on a quality investor’s shopping list. And that’s because a whole host of unpredictable factors – like macroeconomic data and interest rate movements – can impact their profitability. And unpredictability is a bit of a no-no for the quality style. That said, if any bank was going to make the cut, it’s not surprising it's this Wall Street titan. What’s more, the recent turmoil in the financial sector will have only strengthened one of Morgan Stanley’s central arguments: that the strong get stronger when it comes to banking. See, Morgan Stanley thinks that JPMorgan’s market share gains are set to continue: the bank’s been opening new locations across the country, and a snazzy new local branch can help banks pull in customer deposits. Around 20% of JPM’s branches are less than ten years old – compared to 12% for its rivals at large, and just 5% for its big-bank competitors.

Is it a bank, or an airport lounge? Chase flagship branch in New York.

On top of this, JPM’s been ramping up spending in recent years to improve its technology-leading product offerings. Morgan Stanley sees that spending growth starting to slow, so if revenues continue to march higher, that’s a formula for profit margin expansion.

#3: Old Dominion Freight Line (ODFL)

As everyone knows, past performance is not a reliable indicator of future success. If it were, though, Old Dominion would be a world champ. The firm notched a 15-year record of more than 10% annual sales growth and 20% earnings-per-share (EPS) growth. But trucking (which is this North Carolinian’s business), like banking, isn’t exactly synonymous with quality. That’s because the industry tends to be buffeted by macroeconomic crosswinds and lacks independent growth drivers.

That said, ODFL has maintained strong performance through various economic cycles, which means it can rub shoulders with elite quality companies. Its management takes a countercyclical approach to investing – a common tactic for all the best-managed firms. Basically when the economy falls on hard times, Old Dominion presses home its advantage by investing in new trucks, service initiatives, and new routes – while its weaker competitors hunker down. And that’s a successful market-share strategy in any industry.

Trucking isn’t a sexy growth industry, but Morgan Stanley has identified a few tailwinds that should support continued sales growth here. Firstly, regulation costs have raised the barriers to entry for the industry, so Old Dominion faces fewer competitive threats than it once did. Secondly, trucking (while more expensive than railroad transportation) continues to take share as supply chains become shorter and faster, driving demand for ever-speedier production and shipping. And lastly, technologies like autonomous or semi-autonomous driving help ODFL cut costs and fatten its profit margins.

How can you invest in quality companies?

To start with, you could invest in any of the top three firms from Morgan Stanley’s “30 for 2025” list. What’s more, I’ve added a watchlist of quality firms in the Markets tab of your Finimize app to track. (You’ll see Warren Buffett’s portfolio watchlist there too.)

There’s also a decent selection of exchange-traded funds that you could consider for some quality-company exposure. Check out the iShares MSCI USA Quality Factor ETF (ticker: QUAL; expense ratio: 0.15%): it’s one of the most popular quality-oriented ETFs.

Or, you could roll up your sleeves and start doing the analysis yourself. I wrote about how to identify quality stocks last year, and Theodora recently penned this gem about spotting entire industries with quality characteristics. And, finally, here’s a presentation I recently gave on a core feature of quality investing – compounding. Take in all three of these, and you’ll have a good basis to get started picking your own quality companies.