Goldman Sachs has just revealed a valuable investing strategy that’s worth keeping a close eye on in the coming months. The firm is now recommending stocks with the fastest expected return-on-equity growth (or ROE).
That’s because market upside is increasingly limited from current levels, says Goldman Sachs. “We forecast flat S&P 500 margins through 2020, with risks tilted to the downside. ... Amid concerns about the growth and profitability outlook this year, investors have assigned a premium to companies able to expand ROE,” the firm’s chief US equity strategist David Kostin said.
He directed investors to the firm’s basket of 50 S&P 500 stocks with the highest consensus estimates of ROE growth. This basket is already proving its worth and is currently beating the index by 5 percentage points year-to-date. In essence, ROE reflects the return a company generates on capital that is owned by the shareholders.
“The basket typically outperforms in weakening growth environments as investors assign a scarcity premium to firms that are able to expand ROE despite index-level headwinds,” Kostin told investors. So with this outlook in mind, here are five stocks that feature on the firm’s ROE basket list:
1. Under Armour (UA)
Athletic apparel retailer Under Armour has had a volatile time recently. Shares plunged 20% after the company reported disappointing revenue, on weaker-than-expected North American sales. Rising trade tensions haven’t helped either, although shares are still trading up 23% year-to-date.
Don’t give up yet, says top Stifel Nicolaus analyst Jim Duffy. He has just reiterated his buy rating on the stock with a $30 price target (56% upside potential). He remains adamant that the bullish investing thesis ‘remains in-tact’ and advised investors to focus on UA’s ‘green pasture opportunities’ and ‘capacity for margin improvement and multi-year earnings power’.
“Bears will cling to concerns over growth in North America… [but] we remain confident that Under Armour is building a healthier revenue base in North America, upon which it can grow more meaningfully in future periods, and continue to believe North America revenue can accelerate into 2020 and beyond,” Duffy wrote.
Citigroup analyst Paul Lejuez also focuses on the long-term picture: “With Under Armour in the early stages of its five-year plan, choppiness quarter-to-quarter is not unexpected,” he wrote. The analyst upgraded UA from Hold to Buy back in April, stating at the time “Under Armour has grown up, with a renewed focus on driving profitability and return on invested capital.”
From the Street’s top analysts, UA shows a cautiously optimistic Moderate Buy analyst consensus. That’s with 3 buy ratings vs 1 hold rating and 1 sell rating. Meanwhile the average analyst price target stands at $26 (35% upside potential).
2. Apple (AAPL)
iPhone maker Apple is another key stock highlighted by Goldman Sachs for its ROE potential. Investors rejoiced as Apple reported excellent 3Q:FY19 results and served up a strong outlook. Although the iPhone portfolio continued to struggle in the quarter, Apple grew its non-iPhone revenue by 17% with notable strength in Wearables and further progress in Services.
Following the quarter, five-star Monness analyst Brian White increased estimates, while raising his 12-month price target from $245 to $265 (30% upside potential).
“We found the tone of the call upbeat with Apple serving up a strong outlook and voicing enthusiasm around the innovation pipeline” cheered White. He also noted that the launch of a 5G iPhone in 2020 has the potential to drive a healthy upgrade cycle.
Meanwhile Daniel Ives tells investors not to panic about President Trump’s latest tariff tweets. While AAPL remains the "poster child" for the US/China UFC trade battle, “seeing the forest through the trees the fundamental impact on iPhone production and the potential cost increases are thus far containable in our opinion” Ives said.
Best performing analysts score the stock a ‘Moderate Buy.’ In the last three months, AAPL has received 12 buy ratings and 8 hold ratings. These 20 top analysts have a $228 average analyst price target, indicating 12% upside potential for AAPL stock.
3. Cisco Systems (CSCO)
Worldwide IT leader Cisco has just announced a $2.6 billion deal to buy high-speed optical components maker Acacia Communications. The acquisition should reinforce Cisco’s position as the leader in enterprise networking, enthuses five-star Robert W Baird analyst Jonathan Ruykhaver.
“With the explosion of bandwidth in the multi-cloud era, optical interconnect technologies are becoming increasingly strategic” explained Cisco’s executive VP, David Goeckeler. He added: "The acquisition of Acacia will allow us to build on the strength of our switching, routing and optical networking portfolio to address our customers’ most demanding requirements.”
However, as Ruykhaver points out, the deal will have to go through the standard regulatory process, which includes a Chinese review. He has a buy rating on the stock and $57 price target. Even though Emerging Markets (~20% of revenue) continues to be an area of inconsistency, the analyst believes Cisco remains very well positioned. That’s as the company makes important strides towards a recurring revenue model, which today account for 30% of the company’s revenue.
Like Apple, Cisco shows a Moderate Buy consensus with 12% upside potential from the $60 average price target. Twelve top analysts have published buy ratings on the stock recently, with 5 analysts staying on the sidelines.
4. Sempra Energy (SRE)
Serving approximately 40 million consumers worldwide, California-based Sempra Energy focuses on electric and natural gas infrastructure. RBC Capital’s Shelby Tucker has a buy rating on Sempra with a $145 price target. He made the bullish call despite the company’s recent earnings miss, noting that Sempra maintained its guidance for full year 2019.
“The main driver of the miss to our estimate comes from weaker-than-expected results at SoCalGas and the Texas utilities, partially offset by stronger performance at Sempra LNG. Despite the miss, SRE has reaffirmed its 2019 adjusted EPS guidance range of $5.70-$6.30” noted Tucker.
Only a couple of analysts have published recent ratings on Sempra stock- with the consensus working out at Moderate Buy. Their average price target works out at $147 (8% upside potential).
5. Global Payments (GPN)
Last but not least comes fintech giant Global Payments. The stock is buzzing right now following solid earnings results. Analysts responded with a wave of positive sentiment and price target hikes. Notably, SunTrust analyst Andrew Jeffrey raised his price target to $190.00 (from $175), while Susquehanna’s James Friedman now has a Street-high price target of $200.00 (up from $170 previously).
“The quarter represents yet another beat-and-raise as Global Payments continues to deliver upside on both the top and bottom-line, and we view the updated FY19 targets as likely conservative based on our belief that there is margin upside for the [fiscal year] even beyond the upwardly revised margin outlook,” wrote Jefferies’ Trevor Williams, who rates the stock a buy with a $190 target price. “While the bar for the quarter was relatively high given the run in shares, we think that the results will be enough to sustain the momentum in the stock.”
What’s more the massive $21.5 billion merger with Total System Services (TSS) is now fast-approaching. “Importantly, the TSS merger is set to close as early as the beginning of 4Q19 and preliminary work has led to mgmt. being incrementally more confident in delivering and potentially exceeding targets” commented Deutsche Bank’s Bryan Keane on July 31.
Out of all the stocks highlighted by Goldman Sachs, GPN is the only stock with a ‘Strong Buy’ Street consensus. Indeed, 14 of 15 top analyst ratings in the last three months are a ‘buy.’ Meanwhile the average analyst price target of $180 suggests 11% upside potential lies ahead.