The decade-long bull market is set to continue through early 2020 on the back of a durable profit cycle and ongoing economic expansion, but will be tempered by rising political and policy uncertainty. While that uncertainty is likely to dissipate following the outcome of the presidential election, it will serve to keep the S&P 500 range-bound for most of the next year, according to Goldman Sachs’ recent 2020 U.S. Equity Outlook.
In that context, investors will want to focus on growth at a reasonable price, or GARP. Ten stocks that fit that profile include Alphabet Inc. (GOOGL), MGM Resorts International (MGM), Lowe’s Companies Inc. (LOW), American Express Co. (AMX), Travelers Companies Inc. (TRV), Deere & Co. (DE), Raytheon Co. (RTN), Sempra Energy (SRE), CBRE Group Inc. (CBRE), and Varian Medical Systems Inc. (VAR).
- Bull market is set to continue through 2020.
- Stock rise will be tempered by political and policy uncertainty.
- Economy remains supportive of growth stocks in the medium term.
- Goldman suggests growth stocks with non-extreme valuations.
- S&P 500 could rise 8.3% to 3400 by end of 2020.
What It Means for Investors
Goldman expects the S&P 500 to rise to 3250 in the early part of 2020, implying a 3.5% upside from Tuesday’s close. For investors looking how to play that modest rise, Goldman screened for stocks within the Russell 1000 index that satisfy a variety of growth and valuation metrics. Specifically, the GARP stock screener returned 47 different stocks whose growth profiles are above average and whose valuations are middle of the pack, neither extremely elevated nor extremely discounted.
Growth was the main criterion by which Goldman’s GARP filter was constructed, reflecting the bank’s outlook that the U.S. economy remains supportive of growth stocks in the medium term. Stocks that ranked in the top 20% of their sector’s growth metric made the list. The growth metric was based on averages of past and predicted future sales and EPS growth, and on long-term expected growth.
But because past data shows that growth stocks with extremely elevated valuations rarely grow enough to justify those valuations, the GARP screen excludes stocks ranking among the top 20% of their sector’s valuation metric. That metric is based on a variety of valuation multiples including P/E and EV/Sales ratios, as well as on free cash flow yield. Stocks ranking in the bottom 20% of valuations are also excluded in order to avoid “value traps”, stocks that only look cheap but whose fundamentals make it a risky bet.
The sector that received the highest weighting from the screen, at 23%, was the Industrials sector. Deere & Co. is expected to see EPS and sales growth in 2020 of 11% and 3%, respectively, while Raytheon is expected to see 10% and 7% growth in EPS and sales, respectively. Both stocks trade at 17x forward earnings, slightly below the 18x forward multiple of both the Russell 1000 and the median of Goldman’s complete, 47-stock list.
The Consumer Discretionary sector had the second highest weighting at 21%. MGM Resorts is expected to see EPS and sales growth in 2020 of 144% and 2%, respectively, while Lowe’s can expect EPS and sales growth of 17% and 3%, respectively. MGM trades at 22x forward earnings while Lowe’s at 18x forward earnings, according to Goldman’s report, published on November 25.
Goldman’s base case prediction is that the S&P 500 rises to 3400 through the end of 2020, but that prediction rests on an election outcome in which the federal government is divided. That matters because, historically, elections that result in divided governments have generally been followed by equity returns that exceed those where an election results in a single party dominating the White House, the Senate, and the House of Representatives.