Goldman Sachs has just revealed a valuable investing
strategy that’s worth keeping a close eye on in the coming months. The firm is
now recommending stocks with the fastest expected return-on-equity growth (or
ROE).
That’s because market upside is increasingly limited from
current lofty levels, says Goldman Sachs. Indeed, the S&P 500 has already
put on a 17% sprint year-to-date- which means it is now trading very close to
its fair value relative to interest rates, profitability and price-to-book valuations.
As a result, investors must be particularly savvy when scouting for stocks with
the potential to generate outsized returns.
“We forecast flat S&P 500 margins through 2020, with
risks tilted to the downside. ... Amid concerns about the growth and profitability
outlook this year, investors have assigned a premium to companies able to
expand ROE,” the firm’s chief US equity strategist David Kostin said.
He directed investors to the firm’s basket of 50 S&P 500
stocks with the highest consensus estimates of ROE growth. This basket is
already proving its worth and is currently beating the index by 5 percentage
points year-to-date. In essence, ROE reflects the return a company generates on
capital that is owned by the shareholders.
“The basket typically outperforms in weakening growth
environments as investors assign a scarcity premium to firms that are able to
expand ROE despite index-level headwinds,” Kostin told investors. So with this
outlook in mind, here are five stocks that feature on the firm’s ROE basket
list:
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