Morgan Stanley named a raft of European stocks with strong balance sheets, lots of cash or high shareholder returns. The bank said the latest quarterly results showed a slowdown in revenue, earnings and cash flow “as companies brace for higher interest rates and a less certain macro environment,” but it identified several that appear to be bucking the trend in a research note seen by CNBC on Wednesday. The bank analyzed more than 400 companies that trade on the MSCI Europe index to create several stock screens. On a list of stocks with strong balance sheets, Morgan Stanley included retailers Next , H & M and JD Sports , as well as pharmaceutical firm Sanofi and biotech company Genmab . It also named aerospace companies Airbus and MTU Aero Engines , software company SAP and semiconductor firm STMicroelectronics . “We searched for companies with strong balance sheets and sufficient liquidity that are generating a return over their cost of capital,” the bank stated. The bank said these firms also have an expected free cash flow growth of more than 5% over the next two years. High cash flow and shareholder returns The bank also screened for companies with “resilient high free cash flow.” “Self-financing companies should be better able to weather any prolonged macroeconomic weakness, deploying capital effectively and seizing opportunities that come along the way,” Morgan Stanley said. Its list included oil companies BP and TotalEnergies and utilities firm Centrica , as well as advertising groups WPP and Publicis Groupe . Also on the list are automaker Stellantis and steel supplier Tenaris . “Cash-rich companies with high free cash flow yields should also have better downside protection, while providing upside potential if management is able to deploy its cash effectively,” the bank said. Morgan Stanley also screened for stocks with the highest total shareholder returns, naming InterContinental Hotels , materials company Holcim , fashion firm Burberry and jewelry business Pandora among its picks. Those firms also have “positive free cash flow and net income growth expected over the next 2 years,” the bank said. — CNBC’s Michael Bloom contributed to this report.
Shortly after ChatGPT hit the market last year and instantly captured headlines for its ability to appear human in answering user queries, digital marketing veteran Shane Rasnak began experimenting.
As someone who had built a career in creating online ad campaigns for clients, Rasnak saw how generative artificial intelligence could transform his industry. Whether it was coming up with headlines for Facebook ads or short blurbs of ad copy, Rasnak said, jobs that would have taken him 30 minutes to an hour are now 15-minute projects.
And that’s just the beginning.
Rasnak is also playing with generative AI tools such as Midjourney, which turns text-based prompts into images, as he tries to dream up compelling visuals to accompany Facebook ads. The software is particularly handy for someone without a graphic design background, Rasnak said, and can help alongside popular graphic-editing tools from Canva and Adobe’s Photoshop.
While it’s all still brand new, Rasnak said generative AI is “like the advent of social media” in terms of its impact on the digital ad industry. Facebook and Twitter made it possible for advertisers to target consumers based on their likes, friends and interests, and generative AI now gives them the ability to create tailored messaging and visuals in building and polishing campaigns.
“In terms of how we market our work, the output, the quality and the volume that they’re able to put out, and how personalized you can get as a result of that, that just completely changes everything,” Rasnak said.
Rasnak is far from alone on the hype train.
Meta, Alphabet and Amazon, the leaders in online advertising, are all betting generative AI will eventually be core to their businesses. They’ve each recentlydebuted products or announced plans to develop various tools to help companies more easily create messages, images and even videos for their respective platforms.
Their products are mostly still in trial phases and, in some cases, have been criticized for being rushed to market, but ad experts told CNBC that, taken as a whole, generative AI represents the next logical step in targeted online advertising.
“This is going to have a seismic impact on digital advertising,” said Cristina Lawrence, executive vice president of consumer and content experience at Razorfish, a digital marketing agency that’s part of the ad giant Publicis Groupe.
In May, Meta announced its AI Sandbox testing suite for companies to more easily use generative AI software to create background images and experiment with different advertising copy. The company also introduced updates to its Meta Advantage service, which uses machine learning to improve the efficiency of ads running on its various social apps.
Meta has been pitching the Advantage suite as a way for companies to get better performance from their campaigns after Apple’s 2021 iOS privacy update limited their ability to track users across the internet.
As these new offerings improve over time, a bicycle company, for example, could theoretically target Facebook users in Utah by showing AI-generated graphics of people cycling through desert canyons, while users in San Francisco could be shown cyclists cruising over the Golden Gate Bridge, ad experts predict. The text of the ad could be tailored based on the person’s age and interests.
“You can be using it for that sort of personalization at scale,” Lawrence said.
Meta’s Advantage service has been gaining traction with retailers using it for automated shopping ads, according to data shared with CNBC by online marketing firm Varos.
In May 2023, roughly 2,100 companies spent $47 million, or about 27.5% of their combined total monthly Meta advertising budgets on Advantage+, the Varos data showed. A month earlier, those companies directed 26.6% of their budget, or $44.9 million, to Advantage+.
Last August, when Meta formally debuted its Advantage+ automated shopping ads, companies put less than 1% of their Meta ad spend into the offering.
Meta Platforms CEO Mark Zuckerberg speaks at Georgetown University in Washington, Oct. 17, 2019.
Andrew Caballero-Reynolds | AFP | Getty Images
Varos CEO Yarden Shaked said the increase shows Facebook is having some success in persuading advertisers to rely on its automated ad technology. However, Shaked said he’s “not sold on the creative piece yet,” regarding Meta’s nascent foray into providing generative AI tools for advertisers.
Similarly, Rasnak said Midjourney’s tool isn’t “quite there yet” when it comes to producing realistic imagery that could be incorporated into an online ad, but is effective at generating “cartoony designs” that resonate with some smaller clients.
Jay Pattisall, an analyst at Forrester, said several major hurdles prevent generative AI from having a major immediate impact on the online ad industry.
One is brand safety. Companies are uncomfortable outsourcing campaigns to generative AI, which can generate visuals and phrases that reflect certain biases or are otherwise offensive and can be inaccurate.
Earlier this year, Bloomberg News found that AI-created imagery from the popular Stable Diffusion tool produced visuals that reflected a number of stereotypes, generating images of people with darker skin tones when fed prompts such as “fast-food worker” or “social worker” and associating lighter skin tones with high-paying jobs.
There are also potential legal issues when it comes to using generative AI powered by models trained on data that’s “scraped from the internet,” Pattisall said. Reddit, Twitter and Stack Overflow have said they will charge AI companies for use of the mounds of data on their platforms.
Scott McKelvey, a longtime marketing writer and consultant, cited other limitations surrounding the quality of the output. Based on his limited experience with ChatGPT, the AI chatbot created by OpenAI, McKelvey said the technology fails to produce the kind of long-form content that companies could find useful as promotional copy.
“It can provide fairly generic content, pulling from information that’s already out there,” McKelvey said. “But there’s no distinctive voice or point of view, and while some tools claim to be able to learn your brand voice based on your prompts and your inputs, I haven’t seen that yet.”
An OpenAI spokesperson declined to comment.
A spokesperson for Meta said in an email that the company has done extensive research to try to mitigate bias in its AI systems. Additionally, the company said it has brand-safety tools intended to give advertisers more control over where their ads appear online and it will remove any AI-generated content that’s in violation of its rules.
“We are actively monitoring any new trends in AI-generated content,” the email said. “If the substance of the content, regardless of its creation mechanism, violates our Community Standards or Ads Standards, we remove the content. We are in the process of reviewing our public-facing policies to ensure that this standard is clear.”
The Meta spokesperson added that as new chatbots and other automated tools come to market, “the industry will need to find ways to meet novel challenges for responsible deployment of AI in production” and “Meta intends to remain at the forefront of that work.”
Stacy Reed, an online advertising and Facebook ads consultant, is currently incorporating generative AI into her daily work. She’s using the software to come up with variations of Facebook advertising headlines and short copy, and said it’s been helpful in a world where it’s more difficult to track users online.
Reed described generative AI as a good “starting point,” but said companies and marketers still need to hone their own brand messaging strategy and not rely on generic content. Generative AI doesn’t “think” like a human strategist when producing content and often relies on a series of prompts to refine the text, she explained.
Thus, companies shouldn’t simply rely on the technology to do the big picture thinking of knowing what themes resonate with different audiences or how to execute major campaigns across multiple platforms.
“I’m dealing with large brands that are struggling, because they’ve been so disconnected from the average customer that they’re no longer speaking their language,” Reed said.
For now, major ad agencies and big companies are using generative AI mostly for pilot projects while waiting for the technology to develop, industry experts said.
Earlier this year, Mint Mobile aired an ad featuring actor and co-owner Ryan Reynolds reading a script that he said was generated from ChatGPT. He asked the program to write the ad in his voice and use a joke, a curse word and to let the audience know that the promotion is still going.
After reading the AI-created text, Reynolds said, “That is mildly terrifying, but compelling.”
European stocks are are having a good year so far. The benchmark Stoxx 600 is up around 7% since the beginning of 2023 — its strongest start in over 26 years, according to Bernstein’s analysis. That’s better than the S & P 500 , which returned 5.8% in the same period. While the underperformance has been marginal, the outlook for U.S. stocks is decidedly more muted — Wall Street is still wary of a recession. European stocks are therefore worth a look in the near term, according to Bernstein, which expects more upside for them. “We think there is still moderate upside. The region is still trading at a discount to its average historical multiple, both in absolute and relative terms. It is still cheaper than usual vs. the U.S,” Bernstein’s analysts, led by Sarah McCarthy, wrote in a note on Jan. 24. The bank added that there’s more room for “positive earnings surprises” in Europe than in the United States, given lower earnings expectations for the former. On top of that, share buyback yield is higher in Europe than the U.S. for the first time ever, according to Bernstein. Stock picks One of Bernstein’s top plays is low leverage stocks, which the bank defines as stocks with a low net debt to equity ratio. “Our macro analysis shows that European low leverage can outperform when leading indicators are predicting recessions and also when interest rates are rising, as is the case presently,” Bernstein strategist Mark Diver wrote on Jan. 19, adding that low leverage stocks have returned an annualized average 8.7% in past European recessions, he added. The bank’s top overweight-rated picks in this area are Publicis Group , LVMH Moet Hennessy , L’Oréal , Equinor and Airbus . Barclays is also “tactically overweight” on Europe compared with the U.S. because it views the region’s stocks as under-owned and cheap. It named seven “conviction stock ideas with catalysts” in the coming quarters, which it said has average potential upside of 25%. Finnish oil refiner Neste makes the bank’s list, given the bank’s view of a global shortage of renewable diesel to support product prices until at least 2024. Barclays also likes German energy firm RWE for its “undervalued” renewables growth pipeline. “We believe investors are overlooking RWE’s transformation into Europe’s third-largest renewables player, particularly related to its renewables growth pipeline,” Barclays’ analyst Rob Bate wrote on Jan. 20. Also making Barclays’ list is Telefonica Deutschland . The bank said it believes the company can deliver low-to-mid single digit revenue growth that will translate into rising free cashflow, which will in turn support the company’s dividend payouts. Morgan Stanley named several stocks to buy ahead of a hotly anticipated earnings season in Europe. They include Universal Music Group , whose share price the bank expects to rally into earnings season, as well as French hospitality group Accor , which Morgan Stanley expects to deliver a strong fourth quarter and beat consensus estimates. Other picks include SAP, Teleperformance and Elis. Bank of America has a number of European picks with exposure to higher Chinese consumer spending and improving overall demand in light of China’s reopening. Dutch tech investment group Prosus NV derives 80% of its revenue from China, giving it the highest sales exposure by a long mile, according to Bank of America. Other stocks with more than 30% revenue exposure to China include BMW , Standard Chartered , HSBC , Infineon Technologies , Porsche and Swatch . — CNBC’s Michael Bloom contributed to reporting
Rising interest rates have caused corporate bond yields to increase significantly in Europe and the U.S. —with major implications for companies with large amounts of debt. These firms will likely experience higher costs from increased borrowing. “As interest rates continue to rise, corporate bond yields may see further upward pressure, we think that stocks with low debt exposure and a higher quality of debt should outperform,” analysts from investment bank Bernstein said in a note to clients on Jan. 19. Historical analysis done by the analysts shows that when European bond yields rise, stocks with low leverage tend to do better than highly leveraged ones by a larger margin compared to when rates are falling or staying the same. Additionally, investors tend to gravitate toward lower-debt stocks during recessions, as they become less risky due to their ability to cover higher interest payments from their earnings without borrowing additional funds at much interest rates, the analysts said. The below table shows the six European low-debt stocks with a buy rating from Bernstein and an investment-grade credit rating: The MSCI EMU ex-Financials Index stocks above all featured in a Bernstein screen based on a combination of sector net-debt-to-equity ratios and credit ratings. Net-debt-to-equity ratio measures how much leverage a company has relative to its total equity, indicating the financial health and stability of the business. Typically, a value below one would be considered relatively safe, whereas values of two or higher might be regarded as risky investments. Pan-European aircraft manufacturer Airbus and Norwegian energy company Equinor stand out for having a negative debt-to-equity ratio, which means the companies have more equity, backed by assets, than debt. Analysts’ consensus shares price targets for both companies also point toward around 20% potential upside. Airbus’s share price has risen by more than 2% over the past year amid a slump in the broader stock market. The company has seemingly benefitted from the woes engulfing its chief competitor Boeing . Multinational Dutch conglomerate Koninklijke had the largest potential upside of 27% among the stocks on the list. All the stocks listed, including Publicis , LVMH , and L’Oreal , are accessible to U.S. investors as ADRs on U.S. exchanges and over-the-counter markets.
