Investing.com -- Morgan Stanley told investors in a note on Wednesday to use a selective approach to U.S. midstream stocks, identifying attractive entry points in names with differentiated long-term growth while downgrading TC Energy and Hess Midstream on valuation and visibility concerns.

Analyst Robert Kad said the firm sees "median +18.9% one-year total return upside" across its midstream infrastructure coverage, including a 4.7% dividend yield, with Overweight-rated names implying 29.9% total return.

Targa Resources and Williams Companies were highlighted as the firm's preferred names, offering "above-sector, durable EBITDA growth" and the greatest potential for alpha generation.

On ratings changes, Morgan Stanley downgraded TC Energy to Equal-weight from Overweight following strong recent performance, with the stock approaching Morgan Stanley's intrinsic fair value of $103.

Hess Midstream was cut to Underweight from Equal-weight, with the firm citing "limited visibility into long-term growth and sponsor strategy" as likely constraints on upside.

Western Midstream was upgraded to Equal-weight from Underweight, with recent M&A repositioning the company strategically and offering greater visibility into 4% to 5% multiyear EBITDA growth.

Morgan Stanley flagged the Strait of Hormuz situation as a key near-term directional driver for the sector, noting many investors have been reluctant to allocate capital amid unresolved geopolitical tensions.

However, the firm argued that structurally higher mid-cycle crude prices and eventual de-escalation should support a broader re-engagement, with generalist inflows and "more material re-rating" expected to concentrate in large-cap C-corps with the strongest long-term growth profiles.