3 underappreciated smaller stocks that can surge in the final leg of 2025, per Morgan Stanley traders

Morgan Stanley's sales desk has identified Wayfair, Cinemark, and Lionsgate Studio as top small- and mid-cap stock ideas, projecting 20-50% upside amid expectations of Fed rate cuts and an economic revitalization. Wayfair is favored due to an anticipated rate-cutting cycle and a bottoming housing market, with a bull case implying 44% upside. Cinemark is seen as undervalued, with potential for box office recovery to 2019 levels and 24% upside, while Lionsgate Studio is highlighted post-Starz split for its pure-play film/TV focus and path to higher normalized earnings.

Analysis

Morgan Stanley has identified three idiosyncratic small- and mid-cap stocks—Wayfair (W), Cinemark (CNK), and Lionsgate Studio (LION)—as overweight-rated opportunities with potential upside between 20% and 50%. The bank's thesis is set against a macroeconomic backdrop of anticipated Federal Reserve rate cuts, which are expected to revitalize the economy. For Wayfair, despite a 103% year-to-date surge, Morgan Stanley's bull case sees 44% further upside to a $130 price target, driven by the stock's sensitivity to a bottoming housing market and lower interest rates. The analysis highlights Wayfair's marketplace model as a key advantage in navigating potential tariff headwinds, though Wall Street remains divided with an equal number of buy and hold ratings. In contrast, Cinemark is presented as a contrarian investment, with its stock down 9% this year amid narrative of a secular decline in moviegoing. Morgan Stanley refutes this, forecasting a box office recovery to $11 billion in 2026, aligning with 2019 levels, and sets a price target implying 24% upside. Finally, Lionsgate Studio is framed as a pure-play content asset following its split from Starz, poised for higher normalized earnings. The case rests on a strong future film slate through FY27, including major franchise installments, and a plan to double scripted TV series deliveries, reinforcing its position as a key third-party supplier in a consolidating media industry.

Key Decisions for Investors

• Investors bullish on a housing market recovery and interest rate cuts may find Wayfair's 'spring-loaded' profile appealing, but should be mindful of its 103% year-to-date rally and the evenly split analyst consensus which indicates significant debate over its valuation.
• Cinemark represents a contrarian opportunity for investors with a longer time horizon, as the thesis relies on a sentiment reversal and box office recovery in late 2025 and 2026; key monitoring points are box office performance against the $11 billion forecast and the stock's performance relative to negative industry headlines.
• Consider Lionsgate Studio as a special situation play focused on its post-restructuring potential as a pure-play content provider; the investment case is dependent on the successful execution of its upcoming film slate and its ability to scale television production as a third-party supplier.
• These Morgan Stanley picks are highly specific, catalyst-driven ideas that carry idiosyncratic risk, and investors should weigh the potential for significant upside against the stocks' individual performance drivers rather than broad market trends.