Goldman Sachs’ best stocks list
The bank began its analysis by looking at all of the stocks it covers that aren’t rated “sell.” Then, based on its price target for the stock, Goldman calculated the implied upside to the shares’ first-half closing prices.
Examine the ten stocks with the highest return on Goldman’s 12-month target price.
Penn National Gaming has the most potential on the list. Goldman’s target price is nearly double the stock’s June 30 closing price. The casino and racetrack company’s stock is down about 16% this year and down 29% in the last three months.
Las Vegas Sands was also on Goldman’s list. The bank predicts that the casino’s share price will rise by 36.6 percent. Similarly, the stock has underperformed this year, falling about 14% in 2021.
Alaska Air Group is also on Goldman’s list of companies with the greatest potential for growth. Investors were interested in airline shares earlier in 2021 as they anticipated a travel boom, but they have since plummeted. The stock is up more than 11% this year, but it is down about 19% in the last three months.
Furthermore, Goldman Sachs examined the stocks that it does not currently recommend as a buy and that have the lowest returns to its 12-month price target. Take a look at the ten names with the most negative attributes.
Every stock on Goldman’s list of stocks with the lowest returns to target price is up double digits in 2021, but the bank expects those shares to drop as much as 48.5 percent in the next year.
Goldman’s market outlook
In a weekly update, Chief U.S. Equity Strategist David Kostin told clients that the broad market index will finish 2021 at 4,300, about 50 points lower than where it closed on Friday. He attributed the year-end forecast to near-term headwinds such as higher borrowing costs and the prospect of Biden tax reform.
“The primary reasons we forecast that the S&P 500 will trade sideways over the next six months are our economists’ expectations of higher interest rates and higher corporate tax rates by year-end,” Kostin wrote.
A forthcoming rally
Following a sideways second half of 2021, equities should rally about 7% in 2022 as companies that have invested in growth in recent years outperform those tied to the US economy, according to the bank. Kostin predicts that the 500-stock index will reach 4,600 by December 2022.
Companies whose businesses are linked to accelerations and decelerations in US GDP outperformed in the first half of 2021, as Covid-19 vaccine distribution allowed consumers to resume normal activities.
Following a rebound in West Texas intermediate crude prices from $45 to north of $70 per barrel, energy stocks in the S&P 500 had their best first half ever, rallying 42 percent. Martin Marietta increased by 24% in the six months ending June 30, while JPMorgan Chase increased by 22% during the same period.
Reopening plays Carnival and Gap increased by 21% and 66%, respectively.
However, as pent-up demand for clothing, airfare, and energy spreads throughout the US economy, growth-focused firms that were out of favor in early 2021 should be more likely to attract a bid from traders, according to Goldman’s Kostin.
Kostin outlined three strategies for investors hoping to profit from a choppy second half.
First, the strategist reiterated a strategy he promoted in March: looking for stocks with a short “duration.”
Duration is being studied by Goldman as a measure of how quickly a company can repay shareholders through earnings. These firms have strong cash flows sooner, and as a result, their valuations are less reliant on future interest rate levels.
Long duration metrics are common in companies with long-term growth profiles, particularly those that do not currently generate positive net income. Shorter durations are associated with more established companies, which may have more modest growth prospects.
When interest rates rise, investors prefer short-term stocks because higher rates reduce the value of future earnings. According to Goldman, the rate on the benchmark 10-year Treasury note will rise to 1.9 percent by the end of the year and 2.1 percent by the end of 2022. This yield was last seen at about 1.36 percent.
Second, Kostin likes the look of growth stocks in late 2021 and early 2022.
He contends that GDP growth in the United States has peaked or will soon peak, implying that economic activity will begin to slow by the fourth quarter of 2020.
′′[We] expect decelerating economic growth to support Growth versus Value outperformance in late 2H and into 2022, but the trade will remain volatile in the near term,” he wrote. “While economic growth deceleration generally supports owning Growth, rising interest rates and the passage of a fiscal package, including infrastructure and tax reform, would benefit Value, implying a choppy outlook for the trade in the coming months.”
Third, Goldman advises investors to seek out companies with strong pricing power in order to offset any uncontrollable increases in inflation.
Stocks of companies with strong pricing power outperformed in 2018 and 2019, according to Kostin, as wage growth accelerated and profit margins shrank. Though Goldman’s economists believe any price increase is only temporary, the bank noted that an environment of shrinking margins and a tighter labor market may benefit that group.
The ‘oil’ factor
The energy alliance’s talks have been postponed indefinitely after a production plan for August and beyond was unable to be reached after a series of meetings in recent days.
The lack of agreement on the price of oil is “bullish any way you slice it,” Currie said in an interview on “The Exchange.”
“Our base case is $80 per barrel in the third quarter, and the longer this takes [with OPEC], the more risk there is to the upside,” said Currie, the investment bank’s global head of commodities research. “We could easily see prices spiking into the $85-$90 per barrel range during these summer months.”
International standard Brent crude fell more than 3% to around $74.56 per barrel on Tuesday, while West Texas Intermediate crude futures, the US benchmark, fell roughly 2.3 percent to $73.40.
Brent and WTI were both higher earlier Tuesday, with WTI reaching its highest price since November 2014 at $76.98.
If Brent reaches the upper end of Currie’s range, it would represent a roughly 20% increase from where it traded intraday Tuesday.
Currie noted that the lack of an agreement between OPEC and its OPEC+ allies on production increases comes at a seasonally high time for oil demand as people hit the road or fly for vacations. This has the potential to raise prices.
“The tightest market is between now and Labor Day, so you have a huge surge in vacation and travel demand against virtually no supply,” Currie explained. “We estimate that this market was in a 2.3 million barrel per day deficit in June,” he added.
Currie also discussed the impact of rising oil prices on energy companies and their capital spending strategy to drill more. He believes it is too soon to tell whether the growing presence of the environmental, social, and corporate governance, or ESG, movement is causing firms to be more cautious.
“I like to say, ‘Show me a really good commodity company with great returns that isn’t getting capital.'” They are currently emerging from a particularly difficult period. “Part of the reason there isn’t any capital flowing into the sector is that the returns have been dismal,” Currie explained. “We’ve recently seen an increase in the price of oil. Investors are not looking for a one- or two-month increase in oil prices. They want to see good returns for several years.”
“A lot of these investors are saying, ‘Hey, we want our money back before you start really drilling,’ and as a result, the focus of these C-suites will be on return on equity, not growth in large capex budgets,” he explained.