The strategy team at investment bank Goldman Sachs has reversed its bearish position on the market’s long-term outlook, and released a new statement. Writing for the team, strategist David Kostin pushes up his predicted support level for the S&P 500 to 2,750, 14% higher than his previous estimates.
In a bullish coda, an optimistic counterpoint to the low-end call, Kostin’s team says the index may rally as high has 3,200 in 2H20. This would put the index just 5.4% below its all-time high, reached back in February just before the general market collapse.
“The powerful rebound means our previous three-month target of 2,400 is unlikely to be realized. Monetary and fiscal policy support limit likely downside to roughly 10%,” Kostin noted.
Goldman’s forecast fits well with the positive mood among investors. The S&P has bounced 36% from its March trough, and while the rebound is following a shallower slope than the initial fall did, the trend is clearly upwards.
In addition to Kostin’s look at the macro situation, analysts from Goldman Sachs have also been diving into specific stocks. Of particular interest, we’ve pulled the TipRanks data on two stocks that the firm’s analysts predict will show powerful double-digit growth in the second half. And just for contrast, we’ve included one that Goldman analysts say to avoid. Let’s look at the details.
Grocery Outlet Holding (GO)
First up is a grocery chain, located mainly in the Pacific Coast states of Washington, Oregon, and California, but other locations in Idaho, Nevada, and Pennsylvania. Grocery Outlet brings outlet shopping to the grocery industry, offering customers discounted name brand products. The company keeps its shelves stock with overstocked and closeout items to keep the prices low.
GO shares have dramatically outperformed the overall market during the current cycle, gaining 12% year-to-date. But it’s not just share price that has done well. The company’s earnings have also been solid.
In Q1 2020, a period during which most company’s saw revenue and earnings tumble, GO saw a sequential EPS gain of 71%, with sales revenue gaining 25% to reach $760 million. The unique nature of the coronavirus crisis helps explain these results. In a quarter when most economic activity halted, and unemployment began a catastrophic climb, GO’s niche was invaluable: essential groceries, at discount prices.
Kate McShane, 5-star analyst at Goldman Sachs, was impressed enough by GO’s performance to rate the stock with a solid Buy. Meanwhile, her $43 price target implies a healthy 19% upside potential for the year. (To watch McShane’s track record, click here)
In her comments on the stock, McShane noted several factors that will support GO shares this year, including: that the company offers ‘compelling value;’ it’s unique business model, that drives store traffic by providing a ‘treasure hunt experience;’ and the company’s compelling unit growth story – this is a chain that is expanding.
"We think there is still further upside to shares - Although the stock is up [...] since COVID-19 concerns began impacting the market in late February, GO is still trading at a discount to its 1-year avg (39x 2020 EPS vs. avg 42x), and is one of only 3 companies under our coverage that has seen upwards consensus earnings revisions for 2021 (+6.8% for GO; the others are BJ & COST at +0.5% and +0.2% respectively)," McShane concluded.
Overall, GO receives a Moderate Buy rating from the analyst consensus. The stock has 5 recent reviews, including 2 Buys and 3 Holds. Shares have an average price target of $41.20, which suggests a 13.5% premium from the $36.31 share price. (See Grocery Outlet stock analysis on TipRanks)
Cedar Fair Entertainment Company (FUN)
And now we turn to the amusement park industry. Cedar Fair is a company familiar to many Midwesterners, as it’s the parent company of Sandusky, Ohio’s Cedar Point amusement park. In addition to that famous asset, Cedar Fair also owns 13 additional amusement and water parks, along with 5 hotels, in the US and Canada.
At first glance, FUN shares haven’t had a fun time lately. The stock has underperformed this cycle, and is still down 40% since year-to-date. Earnings turned sharply south in Q1, and the company posted a worse-than-forecast EPS loss of $2.15.
But there is a bright spot – the coronavirus and the economic shutdowns hit during the winter, when the amusement parks are usually closed for maintenance. FUN usually posts its worst quarter of the year in Q1, and this year fit the pattern. As economies reopen, and people begin to seek out leisure activities again during the summer, Cedar Fair expects to see positive results.
This optimism – and management’s understanding of the company’s normally cyclical earnings – led the company to maintain its dividend during these difficult times. For investors seeking a steady income or a high return, FUN’s dividend bears watching. At 93.5 cents per share quarterly, it annualizes to $3.74 and gives a whopping 11.5% yield. That yield is almost 6x the average found among S&P-listed companies, and far outpaces the >1% that Treasuries are currently yielding.
Writing for Goldman Sachs, analyst Stephen Grambling says of FUN, “We anticipate three factors to drive a faster recovery vs. peers near-term, as well as, position the company longer-term to drive upside to consensus estimates: 1) FUN parks currently have near the lowest exposure to COVID cases and unemployment; 2) FUN has historically had the lowest operating leverage of the peer group…; 3) the company’s focus on events to drive newness should sustain market share longer-term.”
Grambling likes what he sees here, and rates the stock a Buy along with a $43 price target. This target implies a robust one-year upside potential of 33%. (To watch Grambling’s track record, click here)
All in all, the analyst consensus rating on FUN is a Strong Buy, based on 8 reviews. These include 6 Buys against just 2 Holds. The current share price is $32.45; the $34.88 average price target suggests just an 7.5% upside, implying more caution here than Grambling believes is needed. (See Cedar Fair stock analysis on TipRanks)
Six Flags Entertainment (SIX)
Finally, we look at Goldman Sachs' Sell call. The famous park operator Six Flags is a stock that the firm says you should be wary of. The reason?
Goldman Sachs' Stephen Grambling points out that in the states where Six Flags operates, the park chain has a high exposure to COVID-19 cases and to locally severe unemployment, and that the company has been required to spend capital on material reinvestment to combat stagnating organic attendance; both factors will make it difficult for SIX to bounce back from the coronavirus.
"SIX has exposure to states and regions that currently face the highest rates of COVID-19 infection and economic pressures. In addition [...] SIX has been vocal in the need to reinvest in the park experience and attractions to reinvigorate growth (even before COVID-19 impacts were felt), which likely limits flow-through on reopening, in our view," Grambling wrote.
To put some numbers on the hit SIX took, the stock is still down 48% year-to-date, and Q1 saw an EPS net loss of $1. That said, SIX, like FUN, sees its worst quarter in the winter, due to cyclical park closures, and that $1 per share loss was not as deep as was expected.
At $22, Grambling's price target implies about 6% downside to SIX shares, and backs his Sell rating. (To watch Grambling’s track record, click here)
Even in its current straits, SIX shares have a Moderate Buy rating from the analyst consensus. This is based on 6 Buys and 7 Holds… and Grambling’s Sell. The stock is priced at $23.33, and the average price target of $19.95 indicates a likely 14.5% drop this year. (See Six Flags stock analysis on TipRanks)
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