While geopolitical uncertainty and rising tensions between the U.S. and its major trade partners such as China and the EU have driven the global markets into a period of heightened volatility in the nearly decade-running bull market, corporate profitability has been able to carry U.S. equities higher in 2018. In the July 13 Goldman Sachs U.S. Weekly Kickstart report, the investment bank highlighted 25 stocks that rank above average in terms of measuring profits from both an earnings and asset productivity perspective. In this second part of a two-part series, Investopedia looks at seven stocks out of Goldman’s group, across financial, biotech, techs and consumer, which have also have dramatically beaten the market year-to-date (YTD). (For more, see also: 8 High-Profit Tech Picks From Goldman Sachs.)
The S&P 500 is up 5% year-to-date (YTD) as of Thursday afternoon, moving past 2,800 for the first time since Feb 1 as it is supported by healthy corporate profits. Yet as profit growth cools off thanks to rising interest rates and as the one-time lift from the Republican tax overhaul wears off, investors should look for stocks that have high net margins and return on assets (ROA), according to Goldman.
“With the economy at full employment, higher wages and rising input costs will pose downside risks to gross margins,” wrote Goldman. “These firms are profitable from both an earnings and an asset productivity perspective and are well-positioned as margin expansion slows.”
S&P 500 ROA increased 16.6% in the first quarter, the highest level on record apart from Q4 1997. While corporate profits were driven by improved margins in Q1, low asset productivity constrained ROA. The median company in Goldman’s list is forecasted to post a ROA of 22% and net profit margins of 24% this year, versus a ROA of 8% and net profit margin of 12% for the S&P 500. Tech companies are disproportionately represented on the Goldman Sachs list, making up 66% of the group. (For more, see also: ‘Stealth Bull Market’ May Push Stocks to New Highs.)
Our picks include: Mastercard Inc. (MA), Visa Inc. (V), Vertex Pharmaceuticals (VRTX), Intuitive Surgical (ISRG), Biogen Inc. (BIIB), IPG Photonics Corp. (IPGP) and F5 Networks Inc. (FFIV).
|Median S&P 500||3%||8%|
Visa to Outperform on Consumer Spending Trends
As investors gear up for earnings season, bulls including Oppenheimer’s Glenn Greene see credit card company Visa as a buy on accelerating retail sales and “healthy” card-issuer volume growth, as outlined by Barron’s.
Bank of America Merrill Lynch analyst Jason Kupferberg also chimed in with an upbeat outlook for Visa ahead of earnings, indicating that the firm is likely to beat consensus estimates as it benefits from consumer spending trends, as reported by U.S. News. Citing data from SpendTrend, BAML said Q2 year-over-year (YOY) card volume grew 4.9% for Visa and Mastercard, the highest level since 2012. Meanwhile, in the U.S., retail sales growth in Q1 was 5%, and gasoline, which represents between 7% and 9% of total U.S. card volume for Visa, saw a YOY price hike of 20.1% in Q2.
Vertex ‘Best Sales/Earning Momentum Profile in Large-Cap Biotech’
Boston-based Pharmaceutical company Vertex has also been a favorite on the Street. Oppenheimer analyst Hartaj Singh expects shares to rally as much as 58% from current levels to reach $285 in a bull case scenario, as outlined by Barron’s. He notes that since breaking even in late 2015, the company has seen earnings per share (EPS) grow 433%, while its share price has increased just 28%. For comparison, in the three years after Alexion Pharmaceuticals (ALXN) and Regeneron Pharmaceuticals (REGN) broke even, their EPS skyrocketed 325% and 150%, respectively, while their shares rose 160% and 347%, respectively. Oppenheimer called Vertex “the best sales/earnings momentum profile in large-cap biotechnology” over the coming years.
“By 2023 estimated—depending on speed of triplet uptake—sales could quadruple and earnings sextuple, with room for upside,” wrote Singh.
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