Daily Management Review

Goldman Strategists Believe Shares Of Consumer Staples And Small Caps Are Valuable


According to Goldman Sachs strategists on Tuesday, there may be pockets of value in the increasingly pricey U.S. stock market among small-cap stocks and shares of consumer staples companies.
The S&P 500's recent run has brought it dangerously close to a new record high, but it has also made equities more expensive historically. As of right now, the index's price-to-earnings ratio is 20 times, up from 17 times in October.
The strategists, led by David Kostin, stated in their most recent weekly Kickstart note that this places the company's present valuation in the 85th percentile historically since 1990.
The strategists noted that the market's rally has extended beyond the megacap stocks that accounted for the majority of the S&P 500's gains for the most of last year. The valuation for the equal-weight S&P 500, opens new tab - a proxy for the average stock in the index - has also increased, from 14 times in October to 16 times.
Three trades that "offer value in a highly-valued market that has largely priced our benign outlooks for U.S. economic growth and Fed policy" were highlighted by Goldman's strategists.
The analysts stated that even with the recent increases in small caps, the Russell 2000 opens new tab trades at a multiple of 2 times price-to-book, which is less than its 10-year average of 2.2 times.
"The combination of low current valuations and a healthy economic outlook implies that the Russell 2000 should return roughly 15% in the next 12 months," according to the note.
The strategists also choose poor pricing power equities, which are generally held by businesses whose products might face a decline in demand as prices rise. They point out that these stocks are trading at a 14% discount to strong pricing power stocks.
According to the analysts, stocks with low pricing power often do better when profit margins rise. These margins stand to gain from falling labour costs as well as from a stable environment for economic growth.
Lastly, the strategists note that while utilities, another typically defensive area, have slightly outperformed, consumer staples shares have underperformed the market recently and that they now offer good prices.
In the report, Goldman stated that "pessimism around the Consumer Staples earnings outlook has also shown signs of bottoming," in response to worries about rising costs and the influence of novel weight-loss medications on customer behaviour.