Daily Management Review

Goldman Sachs names favorites among stocks


Investors are concerned about slowdown in corporate profits, but Goldman Sachs has some advice for those who is not sure how to handle this situation.

Public Domain Pictures
Public Domain Pictures
For some companies, experts predict an increase in profits of 20% and higher in 2019. The list includes companies from different market sectors, such as Wellcare Health Plans, Incyte Corp., Chipotle Mexican Grill, Advanced Micro Devices (AMD), Under Armor and Netflix.

Goldman notes that this year the growth in earnings per share (EPS) of 43 companies of the S&P 500 index will exceed 20%. On the contrary, the same indicator of 19 firms will decline by more than 20%.

"Our study once again confirmed the fact that choice of companies for investment should be approached thoroughly in order to diversify risks", - experts of Goldman say.

The bank recommends that market participants pay their attention to those stocks that are less dependent on general trends. “We advise investors to take into account the relative value of the company, as well as its capabilities,” the bank’s latest report says.

In September, analysts predicted EPS growth of 10%, but currently the consensus forecast has dropped to just 4%. Nevertheless, Goldman notes that many investors lose sight of the big picture.

Analysts expect EPS to increase by about 7% on average for 2019. Experts also predict revenue growth of 5%.

The weakest players of the S&P 500 are pulling the rest of the companies down, which leads to a more modest profitability of an individual sector or the entire index as a whole. In this regard, Goldman recommends paying attention to the firms with the highest idiosyncratic risk (unsystematic risk, which is characteristic not of the market as a whole, but of a particular asset or enterprise).

The best forecast for earnings growth per share for Wellcare is 29%, the weakest is 22%, which is also quite a lot. The company has a high dispersion rate - 11.9%, the fourth largest in the group.

Wellcare has a market capitalization of approximately $ 14 billion. The company offers health care plans mainly through Medicaid, Medicare Advantage and Medicare Prescription Drug.

During this year, the value of the company's shares has already increased by 18%, far ahead of the market. One of the positive factors for further growth is the growing demand of the population for health services.

Goldman also notes Incyte, a pharmaceutical company that owns a drug called Jakafi, which is approved by the US Food and Drug Administration. Shares of the manufacturer rose by about 30% this year. As expected, Incyte sales growth this year will be 8%, EPS will increase by 89%. The company’s variance estimate is 8.7.

It is important to note that even those companies whose profits are growing rapidly may face difficulties. For example, if the economy plunges into recession or a steady bear market replaces an uptrend.

source: goldmansachs.com