Best stocks to buy now according to Goldman
The prospect of rising inflation has caused market jitters in recent months, and increases in the prices of wages and commodities have squeezed profit margins for some firms.
However, Goldman analysts predicted that company margins would recover “very quickly” following the Covid scandal, as they identified stocks that could outperform the rise.
“European net income margins will return to pre-Covid levels as early as this year, peak in 2022, and contract modestly in 2023.” The analysts led by Jessica Binder Graham wrote in a research note published last week, “This very rapid recovery is a function of the strong GDP acceleration that we expect.”
Here are a dozen of Goldman’s buy-rated recommendations:
Consumer goods and pharmaceuticals
Goldman’s picks include Unilever, which has a potential 10% increase in its price target over the next 12 months, Carlsberg, which has a 7% increase, and Adidas, which has a 16% increase. Bayer is also on the list, with a potential 38 percent increase in its price target.
Chemicals and machinery
CNH Industrial, an Italian equipment firm, is a pick for the bank, which estimates a potential 20% upside to its price target. It also chose Dutch paint company AkzoNobel, which has a 14 percent potential upside, and ingredients company DSM, which has a 12 percent potential upside.
Goldman’s telco stock picks include Vodafone, which has a 38% potential upside to its target price, Tele2, which has a 37% upside, and KPN, which has a 21% upside.
The bank chose Getlink, which has an estimated 18 percent upside to its price target, and Ferrovial, which has a 10% upside.
Goldman analysts examined post-recession recoveries over the last 40 years and found that consumer goods prices have typically risen faster than wages. In the first two years of a recovery, input prices — the cost of producing goods — have “almost always” risen faster than output prices, they claim. However, the analysts added that net income margins have continued to expand “sharply” during this period, and they anticipate a similar pattern in the post-pandemic recovery.
“The unprecedented level of savings should enable companies to implement even more proactive price increases,” the analysts added. “Comments about inflation outnumbered those about labor costs or input costs during the first quarter earnings season. Many businesses have already raised their prices,” they wrote.
The stocks mentioned above are part of Goldman’s search for companies in Europe’s STOXX 600 index that are exposed to commodities and had a higher gross margin in 2018 than in 2016. “Furthermore, we only include companies that have increased gross margins in the five years preceding 2020,” the analysts wrote.
“This has never stopped net income margins from expanding dramatically at this stage. Typically, it is not until the third year of a recovery that output prices catch up and accelerate,” the analysts wrote.
Bull markets always find a way, and this one is doing just enough each day to maintain the uptrend in the face of some slippage in the economic-recovery theme and a lack of broad participation by the majority of stocks in the latest leg higher.
Defensive/reliable mega-cap growth/tech have done more than their fair share this month, up about 6% and helping the S&P5000 to a 2% June gain so far.
That looks like another break higher from a long sideways range, though these can always be subject to switchbacks. The S&P5000 and Nasdaq 100 are already looking overbought, despite the fact that the tape is narrowing and the S&P only recently started rolling after two months of churn. Some traders will tell you that when a market becomes overbought, it means the buyer’s urgency has returned, but we’ll see as volumes and market velocity have been unimpressive.
The equal-weighted S&P is still not quite there, as opposed to the previous breakout, when it was fully part of the fun.
As previously stated, only about half of S&P500 stocks are above their 50-day moving average, which is unusual given that the index is at a record high. Not all rallies must be broad to be considered “real,” and a selective tape in a healthy market can simply mean localized corrections and rotations. Consider what happened last summer, when FAANMG held everything together for months until those stocks became far too stretched.
Of course, most stocks lagging the indexes could portend a catch-up rally at some point. However, there are times when poor breadth leads to a more general market rollover or suggests that the macro backdrop is deteriorating. TBD.
We have definitely seen air come out of the reflation plays, with Delta variants and re-imposed global restrictions calming the “synchronized global boom” idea at the same time central banks have signaled that the moment of peak support has passed. This is a standard and necessary phase of every cycle; it is not a death sentence for risk assets, but it can indicate a choppy environment.
Semis are softer today, but they have reclaimed the lead, threatening to supplant transports as the bulls’ preferred macro bellwether. Analysts were out trying to support some marquee cyclicals following pullbacks, with upbeat morning calls on FDX, GE, and CSX, making the case that these stocks’ 10% declines are a chance to buy. FDX and GE have gained some traction, but not CSX.
Banks are being rewarded, but not in proportion to the amount of upside they have compared to expectations in their dividend and buyback plans. So far this year, the shareholder-return theme has been a clear winner, which makes sense as earnings momentum fades.
Underlying signs of apprehensive capital-markets stress are difficult to find. Credit markets are absorbing yet another flood of new issuance, including a slug from Salesforce to fund the Slack acquisition, and spreads have remained tight and demand has remained strong at stingy yield levels.
Bulls are also reassured by the structure of volatility instruments, with VIX futures prices sloping upward for months to come – the “normal” and supportive arrangement for such things:
So far today, breadth is mediocre, up/down volume is close to even, and the majority of NYSE issues are higher. Seasonal factors are typically very strong for the next couple of weeks, and then calendar effects become less friendly, at least on average over the sweep of market history.