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Goldman Sachs Recommends Alphabet, Mastercard and PepsiCo

- By Alberto Abaterusso

CNBC reported Monday that Goldman Sachs analyst David Kostin has recommended investors increase their portfolio defensiveness through investments in high-quality stocks, as many clients of the American bank are fearing that a U.S. economic recession will arrive in 2020.


Therefore, Goldman Sachs suggested investors increase their positions in companies with strong balance sheets, high returns on equity and consistent cash flow. The firm also recommended readdressing investing strategies toward those sectors that tend to outperform when economic growth slows down, which are communication services and utilities.

Regarding individual stocks that investors should acquire to enhance defensiveness, the bank major suggested Alphabet Inc. (GOOGL) (GOOG), Mastercard Inc. (MA) and PepsiCo Inc. (PEP).

As a matter of fact, the graph below shows that over a five-year period, from May 2006 to April 2011, which includes the Great Recession in gray, Alphabet rose 48%, Mastercard climbed 451% and PepsiCo gained 12%, outperforming the S&P 500 index's 3% return and the Dow Jones Industrial Average's 8.8% return.

Let's dig in a bit to each of the three stocks suggested by the analyst.

For the 52 weeks through Dec. 17, Alphabet's Class C shares declined 5% to $1,016.53 and the Class A shares fell to $1,025.65. The share price is below the 50-, 100- and 200-day simple moving average lines.

The indicators on the stock suggest that:

  • The market capitalization is $710.12 billion.
  • The price-book ratio is 4.2 versus an industry median of 3.85.
  • The price-sales ratio is 5.63 versus an industry median of 2.60.
  • The price-earnings ratio is 38.63 versus an industry median of 33.49.
  • The forward price-earnings ratio is 22.17 versus an industry median of 25.77.
  • The 52-week range is $984 to $1,291.44 for Class A stock.
  • The 52-week range is $980 to $1,273.89 for Class C stock.
  • The recommendation rating is 1.7 out of 5 for Class A stock.
  • The average target price is $1,349.28 per share of Class A stock.
  • The recommendation rating is 1.5 out of 5 Class C stock.
  • The average target price is $1,328 per share of Class C stock.



GuruFocus has assigned a financial strength rating of 9 out of 10 and a profitability and growth rating of 9 out of 10.

Alphabet has a return on equity of 11.70% compared to an industry median of 6.33%.

The company has generated over $45 billion in cash flow over the last 12 months of operations. Of that, 46% was levered free cash flow. The operating cash flow is progressing amazingly, as illustrated in the chart below. The item has increased 19.2% on average every year over the last five years. The company does not pay a dividend, however.

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The company closed 2017 with earnings of $32.28 per share on $110.86 billion in revenue. For full-year 2018, analysts are predicting net earnings will grow to $41.78 per share and revenue will increase 23.1% to $136.47 billion. Over the next five years, analysts forecast net earnings will grow an average 15.22% per annum.

Mastercard was trading around $190.45 per share at close on Monday. The share price has increased 26% over the past year, but it is still below the 50-, 100- and 200-day simple moving average lines. The 52-week range is $149.89 to $225.35.

Mastercard has a market capitalization of $196.7 billion, a price-book ratio of $34.25 versus an industry median of 1.19, a price-sales ratio of 13.87 compared to an industry median of 3.46 and a price-earnings ratio of 38.47 versus an industry median of 16.14. The forward price-earnings ratio is 25.71 versus an industry median of 12.5.

The recommendation rating is 1.7 out of 5 and the average target price is $233.76 per share.

GuruFocus has assigned a financial strength rating of 7 out of 10 and a profitability and growth rating of 8 out of 10. Mastercard has a ROE of 90.54% versus an industry median of 6.88%.

The company has produced $6.61 billion in cash flow over the last 12 months of operations. The chart shows operating cash flow is progressing at an exponential pace. The average annual growth was nearly 11% over the last five years.

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Mastercard is allocating a portion of the operating cash flow to dividend payments. The company has distributed dividends since 2006. On Dec. 4, Mastercard announced a 32% increase in the quarterly distribution to 33 cents per common share, up from 25 cents. Mastercard will pay the dividend on Feb. 8, 2019 to shareholders of record as of Jan. 9. The ex-dividend date is scheduled for Jan. 8. If held constant, the cash quarterly dividend leads to a forward dividend yield of 0.68%. The industry median is 2.72%.

The company is also increasing the annual sales turnover. Revenue of $12.5 billion produced earnings of $4.58 per share in 2017. For full-year 2018, consensus is for 19.5% sales growth to $14.95 billion, which is expected to back higher earnings of $6.45 per share. Analysts are also forecasting that net earnings will grow 22.75% on average every year over the next five years.

Following a 5% drop for the 52 weeks through Dec. 17, PepsiCo's closing share price was $112.9 on Monday for a market capitalization of $159.32 billion. The share price is still slightly below the 50- and 100-day simple moving average lines, but well above the 200-day line.

The price was 17.6% off the 52-week low of $95.94 and 8.5% below the 52-week high of $122.51. The price-book ratio is 15.49 versus an industry median of 2.56, the price-sales ratio is 2.49 versus an industry median of 1.36 and the price-earnings ratio is 32.53 compared to an industry median of 23.36. The forward price-earnings ratio is 19.05 versus an industry median of 21.05.

The mean recommendation is 2.5 out of 5 and the average target price is $116.55 per share.

GuruFocus has assigned a financial strength rating of 6 out of 10 and a profitability and growth rating of 7 out of 10.

The ROE is 44.61% compared to an industry median of 10.07%.

The operating cash flow for the trailing 12-month period through the third quarter was $8.64 billion. The operating cash flow is growing. The average annual growth was 3.3% over the last five years.

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Approximately 70% of the operating cash flow is free cash flow. The company is allocating a portion of free cash flow to the payment of dividends, which have been distributed since 1972.

PepsiCo is paying 92.8 cents per ordinary share for a forward dividend yield of 3.26% versus an industry median of 2.21%. The forward dividend yield is based off of Monday's closing share price.

For 2018, analysts are forecasting earnings of $5.66 per share, which is an 8.2% increase year over year, on a revenue of $64.7 billion. The company produced $63.52 billion in revenue in 2017.

Annual net earnings are predicted to increase 6.95% on average for the next five years.

Disclosure: I have no positions in any securities mentioned in this article.

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This article first appeared on GuruFocus.