Do Morgan Stanley’s Preferred Business Model Stocks Beat the Market?
Assessing the market performance of fundamental picks
For several years, Morgan Stanley has been curating a selection of stocks built on what it considers the best business models. The most recent update to this list, published in January 2025, can be found here. These selections are grounded in a rigorous analysis of fundamentals and the intrinsic quality of each company's business model.
And I could not agree more with their approach. But let’s dig deeper: how exactly does Morgan Stanley define and select these high-quality business model stocks? And, how have they performed? Let’s take a closer look.
The selection process
Here is the selection process:
1. Quant scoring of companies against industry peers for
Quality (profitability – eg, ROE / RNOA – and balance sheet strength)
Value Factor overlay (eg, FCF Yield, EV / EBITDA and P/B)
2. Input from MS bottom-up analysts, focusing on forward-looking assessments of competitive advantages and management quality
3. Review by the regional Equity Strategy and Sustainability teams
Interestingly, valuation plays a clear role in the selection process. Perhaps the list should be renamed “Best Business Models at a Reasonable Price” (BBMARP, anyone?). Beyond pure fundamentals, the methodology combines both quantitative metrics and qualitative assessments, introducing a layer of subjectivity into the final selection.
The 2025 selection
The picks are globally diversified. Out of the 31 selections, only 6 are new additions, highlighting a stable and consistent selection process. As a result, we will evaluate performance not only for 2025 but also for 2024, even though some stocks were added at a later stage.
Performance
The outperformance is clear, even if a few selections may appear unconventional at first glance. YTD, the picks have delivered a positive return of +3.2%, compared to a -3.3% decline for the S&P 500 and a flat +0.5% for the MSCI World.
Over a 1 year horizon, the picks have outperformed their benchmarks by approximately 50%, and over 3 years, by an impressive 100%. Without a doubt, this list deserves close attention.
The reasons of the good performance
What makes this list even more compelling is that some of the names would not have been my first picks: Technip Energies, Deutsche Telekom or Inditex for example. Yet, the performance speaks for itself.
There are several valuable takeaways from this selection:
Diversification matters. The portfolio spans sectors and geographies, enabling resilience across varying market conditions
Balanced methodology. The blend of quantitative metrics with qualitative judgment creates a more nuanced and effective selection process
Valuation is key. Incorporating valuation ensures the picks are not just quality businesses, but also reasonably priced, something that pays off over the long run
Strong business models stand out. Whether it is Inditex’s proximity-based supply chain, Wolters Kluwer’s data monetization strategy, or the exceptional brand equity of Hermès and Ferrari, each company demonstrates a clearly differentiated and powerful model
Long-term growth driver. Most of these picks have strong growth drivers that support their long-term potential
While this newsletter provides valuable content for free subscribers, becoming a paid subscriber unlocks even greater benefits to help you gain an edge in the market.
Here is why upgrading to a paid subscription is worth it:
Access exclusive content. Dive deeper with detailed analyses, advanced insights, and premium research not available to free subscribers
Follow my portfolio. Gain exclusive access to my portfolio, including monthly updates, tracking my moves, and watchlists
Discover more stock ideas. Explore in-depth stock ideas, technical analyses, and strategies tailored to uncover hidden opportunities
Support this newsletter. Your subscription directly supports the creation of high-quality, valuable content to help you achieve your investment goals
Upgrade today and take your investing knowledge and performance to the next level!