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Top broker is tipping these 5 stocks to outperform from now till June

The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) may have ended the week on a backfoot but there is a small group of stocks that is ready to rally over the next month or so, according to Morgan Stanley.

The top 200 index has slid 0.2% to 6,081 in the final hour of trade – taking its weekly loss to 0.6% – as both the large cap miners like BHP Billiton Limited (ASX: BHP) and the big banks like Commonwealth Bank of Australia (ASX: CBA) came under pressure.

Resource stocks are coming into some profit taking following their recent strong rally while banks are in the sin-bin for bad behaviour and a weakening outlook.

If you are feeling lost on where to look for near-term buying ideas, Morgan Stanley has a tip for you.

The broker is looking to the next S&P/ASX 200 quarterly change for inspiration as stocks that are about to be added to the benchmark have historically rallied by more than 7% on average in the 20 days prior to the official announcement from Standards and Poor (S&P), which manages the index.

“For the period March 2007 to March 2018 inclusive, inclusions outperformed the market by +7.6% for the period 20 days prior to announcement to implementation,” said the broker.

“Combining this with exclusions (long/short) increased the return to +13.2%, with a 77% success rate of outperformance over the 45 rebalance periods measured.”

Morgan Stanley thinks we will see five changes to the top 200 index in June. The two stocks that are most likely to be added to the index include poultry supplier Inghams Group Ltd (ASX: ING) and student placement company Idp Education Ltd (ASX: IEL).

The two additions will come at the expense of struggling franchisor Retail Food Group Limited (ASX: RFG) and media group Seven West Media Ltd (ASX: SWM).

Another three potential (but less likely) inclusions into the index are consumer financing company Afterpay Touch Group Ltd (ASX: APT), rural services group Elders Ltd (ASX: ELD) and artificial intelligence developer Appen Ltd (ASX: APX).

If these stocks are added, they could potentially replace personal care products supplier Asaleo Care Ltd (ASX: AHY), drugs and beauty products group Australian Pharmaceutical Industries Ltd (ASX: API) and storage and information services company IRN MTN/IDR UNRESTR (ASX: INM), better known as Iron Mountain.

If you wanted to buy these potential inclusions, or short-sell the possible dropouts, you will need to do that now as S&P will announce the index changes in three weeks, on June 8.

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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO and BHP Billiton Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Appen Ltd. The Motley Fool Australia has recommended Elders Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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