The tide is turning. Goldman Sachs is now calling an end to an investing strategy it first recommended two years ago.
“For the past two years we have consistently advocated buying strong balance sheet stocks, but we believe the risk-reward has shifted in favor of closing this recommendation,” Goldman Sachs’ equity strategist David Kostin wrote on Feb. 8. “We no longer recommend strong balance sheets.”
These “strong balance sheet” stocks include major names like Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Costco (NASDAQ:COST). So far this strategy has done very well for investors. Goldman Sachs’ basket of 50 strong balance sheet stocks outperformed weak balance sheet stocks by 25 percentage points since early 2017.
However the Federal Reserve’s recent dovish commentary indicates that the hiking cycle may have come to an end. This should ease pressure on corporate balance sheets — leading Kostin to say: “Our recent research showed that strong balance sheets are among the worst performing factors during the 12 months following the end of Fed hiking cycles, when U.S. Treasury yields typically also decline.”
Plus the firm’s optimistic outlook for the economy is also a boost to weaker balance sheet stocks. Investors tend to rotate to strong balance sheet stocks in times of weak or decelerating economic growth. So which stocks should you be looking at now? Here are six stocks from the firm’s weak balance sheet basket. I also use TipRanks‘ data to see what the analysts are saying about these picks.
Let’s take a closer look now:
Stocks To Buy: Delta Airlines (DAL)
Despite the government shutdown costing Delta Air Lines (NYSE:DAL) $25 million in revenue for January, this stock still gets the thumbs up from the Street.
The airline carrier recently reported fourth-quarter earnings that beat expectations thanks to strong travel demand. Delta’s total revenue rose to $10.74 billion during Q4, up 5% year-over-year.
“2018 was a successful year for Delta with record operational reliability, increasing customer satisfaction, and solid financial results in the face of higher fuel costs” said CEO Ed Bastian. “As we move into 2019, we expect to drive double-digit earnings growth through higher revenues, maintaining a cost trajectory below inflation, and the modest benefit from lower fuel costs.”
As Tigress Financial’s Ivan Feinseth (Track Record & Ratings) notes, a strong economy, low unemployment and increases in consumer spending are driving record levels of airline travel.
That’s reflected in the company’s strong buy consensus and 21% upside potential.Want to learn more about Delta? Get the free DAL Stock Research Report.
AT&T (NYSE:T) is a leading provider of IP, broadband, video and wireless services. And through its recent Time Warner acquisition it is now a top-four producer of content globally.
2019 is about positioning for better services growth in 2020 and beyond, says Oppenheimer’s Timothy Horan (Track Record & Ratings). Horan, like most of the Street, currently has a buy rating on T stock. His bullish call comes with a $41 price target for 38% upside potential.
T stock has the ability to integrate its services in unique ways and hassubstantial room to use virtualized technologies to greatly reduce operating and capital expenditures. “We believe that combined with TWX, FCF/share could grow 6% per year” writes the analyst.
Overall, T has a strong buy consensus with 11 buy ratings vs just three hold ratings. Get the T Stock Research Report.
If you haven’t heard of Mylan NV (NASDAQ:MYL) before, listen up. This is a global healthcare company making high quality medicines available to everyone who needs them. In fact, Mylan is the U.S.’s second largest provider of prescription medicine with over 650 different products, including the EpiPen.
One product in particular is generating attention right now. That’s asthma drug Advair. “Long awaited generic Advair approval comes and at a key time” cheered RBC Capital’s Randall Stanicky (Track Record & Ratings) recently. While overdue, MYL received FDA approval for its generic Advair (Wixela Inhub) on Jan. 30. Shares jumped 7% on the news.
Stanicky has a buy rating on the stock with a $50 price target, suggesting 56% upside lies ahead. “MYL remains one of the ‘cheapest’ generic stocks” enthuses the analyst. That’s because its high-value pipeline comes with push-back over (i) low P&L visibility and (ii) governance concerns.
That said, valuation is very compelling with multiple catalysts that could surprise to the upside. Bottom line: “Stronger remaining core base combined with emerging complex generic pipeline should position shares for an upward move.”
However not all analysts are so positive. The Street is currently divided between buy and hold ratings. Get the MYL Stock Research Report.
CBS Corp (CBS)
Even though mass media stock CBS Corporation (NYSE:CBS) just reported a Q4 earnings miss, analysts are staying firmly on side. From top analysts the consensus remains a strong buy. Plus, CBS shares are up 15% since the beginning of this year.
Top Barrington Research analyst James Goss (Track Record & Ratings) has reiterated his CBS buy rating with a $72 price target. That indicates compelling upside potential of 41%. “We view CBS as one of our best value media ideas” Goss writes.
While the lack of syndication deals was largely known going into the quarter, Goss believes consensus had failed to adjust estimates for this high-margin revenue stream. The result: a roughly $100 million revenue and 3-cent EPS miss.
But even so, CBS has just announced that it has hit its 8 million OTT subscriber goal. Prepare yourselves, because this is about two years ahead of schedule.
“At this point, even with the uncertainty at the top and the potential for M&A, CBS trades at a paltry 7x 2019E OIBDA, at a discount to our broadcast affiliate peer group despite owning better stations and all of the content, plus a thriving OTT business” concludes the analyst. Get the CBS Stock Research Report.
General Motors (GM)
The details of the quarter — which were strong — should lead investors to have more confidence in 2019 EPS says Goss. For example, management guided the tax rate to 16%-18% versus the expected 20%.
Plus the analyst continues to view GM’s transformation as underappreciated. “Recent restructuring actions that should lead to ~$4.5bn savings run-rate in 2020 significantly improves GM’s positioning” he writes.
And it seems like the Street agrees. If we zero in on top-performing analysts, we can see GM holds only buy ratings right now. Get the GM Stock Research Report.
Botox maker Allergan (NYSE:AGN) is one the highest-quality companies in the Pharma industry. It is also one of the most-innovative. Allergan is currently advancing a number of key pipeline products through late stage clinical trials, including new oral drugs for migraine, rapastinel for major depressive disorder and CVC for NASH.
However shares have underperformed, with prices sinking 15% in the last year. That’s down to a disappointing revenue outlook for 2019 and increasing competition for drugs including botox.
Plus billionaire hedge fund manager David Tepper is now suggesting the company should sell itself. His Appaloosa hedge fund owns 1.5 million shares in AGN — down 842,591 shares from Q3. So far Allergan has refused Tepper’s suggestion to split the chairman and CEO roles, currently held by Brent Saunders.
However, analysts still see a buying opportunity at hand. Mizuho Securities’ Irina Rivkind Koffler (Track Record & Ratings) is a top-rated analyst according to TipRanks. She has a buy rating on the stock with a $200 price target. That indicates 45% upside potential from current levels. Koffler cites the company’s 4Q18 top and bottom-line beat, down to better Restasis durability, share buybacks and strong injectables.
“We valued AGN solely via DCF analysis of 2018-2025 cash flows. We utilize a weighted average cost of capital of 11% and a 3% terminal growth rate. This analysis generates a valuation of $213 per share, and supports our Buy rating” explains the analyst. Get the AGN Stock Research Report.
TipRanks.com offers exclusive insights for investors by focusing on the moves of experts: Analysts, Insiders, Bloggers, Hedge Fund Managers and more. See what the experts are saying about your stocks now at TipRanks.com. As of this writing, Harriet Lefton did not hold a position in any of the aforementioned securities.
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