- Goldman Sachs‘ chief US equity strategist expects slow going for stocks for the rest of this year, but says investors can use three key strategies to continue to squeeze out profits.
- David Kostin names 20 companies that fulfill two of those three criteria, and two that fit all three.
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Goldman Sachs says stock indexes have already booked most of the gains they’re likely to make this year. But the firm says the right approach could help investors keep generating strong returns anyway.
The S&P 500 is roughly 3% away from the year-end target of 3,000 formulated by David Kostin, Goldman’s chief US equity strategist. And while Kostin notes that high valuations and slowing economic growth could temper returns going forward, he still sees three groups of stocks as poised to do especially well.
They are as follows:
(1) Companies with low operating leverage
Kostin writes that companies with minimal operating leverage tend to do better when the economy slows. Those companies have slower profit and revenue growth than their high-leverage peers do, which is one reason they can be less appealing when growth looks strong.
But Kostin says they have wider profit margins and better returns on equity, and that makes them safer and more appealing when overall economic growth weakens. He adds that in price-to-earnings terms, those stocks are trading at a huge discount today compared to where they’ve been over the past decade.
That’s illustrated in this chart, which shows the low leverage stocks lagging behind their peers.
Goldman Sachs Global Investment Research
Goldman’s low-leverage picks: Texas Instruments, Gilead Sciences, LyondellBassell Industries, Amphenol, VeriSign, Expeditors International, IPG Photonics, PulteGroup, AbbVie, Amgen, Starbucks, Lam Research, KLA-Tencor, Omnicom Group
(2) Companies with low labor costs
Wage inflation is gradually picking up, and that could erode profit margins for companies. Kostin says investors need to look for companies that are relatively protected from that trend. He recommends companies that have lower labor costs as a percentage of their revenues.
This chart illustrates the appeal of those stocks. Kostin says they’re likely to catch up with the 10-year rate of inflation, which has trended higher recently.
Haver Analytics and Goldman Sachs Global Investment Research
Goldman’s labor cost picks: Texas Instruments, Gilead Sciences, LyondellBassell Industries, Amphenol, VeriSign, Expeditors International, IPG Photonics, PulteGroup, AT&T, AES, Western Union, Foot Locker, Hanesbrands.
(3) Companies with high dividend yields and growth
Bond yields have fallen during the market’s rally this year, leaving investors hungry for yield. With the Federal Reserve’s interest rate hikes "on pause," Kostin sees potential in companies with strong dividends and the potential to raise those payments even further.
He says those stocks are currently trading at hefty discounts, as illustrated by this chart:
Goldman Sachs Global Investment Research
Goldman’s dividend growth picks: Texas Instruments, Gilead Sciences, AbbVie, Amgen, Starbucks, Lam Research, KLA-Tencor, Omnicom Group, AT&T, AES, Western Union, Foot Locker, Hanesbrands.
The triple threats
While 20 different stocks meet two of Kostin’s three criteria, just two are in the sweet spot of all three.
One is chipmaker Texas Instruments, which has surged to a gain of almost 24% this year as rising optimism about a US-China trade deal gave tech stocks a giant boost. The other is biotech company Gilead Sciences, which has lagged the market badly with a gain of 4% as weak earnings and tough competition weighed on its shares.
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