As a slowing economy and trade wars cloud the outlook for U.S. companies, Goldman Sachs has compiled a list of stocks that are expected to post double-digit sales increases in 2020 despite strong macro headwinds. And as rising costs squeeze profits, companies with robust revenue growth are in a far better position to expand earnings.
Excluding stocks in the financial, utilities, and real estate sectors, a mere 24 members of the S&P 500 Index (SPX) are projected to increase revenues by 10% or more 2020, per the new edition of Goldman's US Quarterly Chartbook. While the S&P 500 is up by 16.5% year-to-date through Oct. 9, 2019, six of these stocks have posted even more impressive gains: Global Payments Inc. (GPN), 56.2%, Danaher Corp. (DHR), 33.1%, Adobe Inc. (ADBE), 21.2%, Nvidia Corp. (NVDA), 35.4%, Mastercard Inc. (MA), 44.3%, and Microsoft Corp. (MSFT), 36.1%.
- Goldman says 24 S&P 500 companies will post double-digit sales growth in 2020.
- That number is less than 5% of the stocks in the S&P 500.
- Several of these stocks are posting market-beating gains in 2019.
Significance For Investors
These revenue winners are a stark contrast to the broader market. "S&P 500 rose 1% in 3Q, posting positive returns for the 3rd straight quarter. However, returns have diminished each quarter this year as trade tensions have pushed Economic Policy Uncertainty Indices to recorded highs," Goldman writes. As of the close on Oct. 9, the S&P 500 had advanced by a mere 1.4% over the past year.
Again excluding financials, utilities, and real estate, only 94 stocks in the S&P 500 are forecasted to generate positive revenue growth in 2020. The growth rates for the six highlighted stocks are: Global Payments, 69%, Danaher, 22%, Adobe, 18%, Nvidia, 17%, Mastercard, 13%, and Microsoft, 11%. Goldman's analysis is based on consensus estimates gathered by FactSet Research Systems.
Below is a closer look at what's driving revenue growth at Danaher, Microsoft and Nvidia.
"Over the past 30 years, Danaher has successfully transitioned from an industrial tools company to a leading science and technology company, with high margins, high recurring revenue, and excellent cash flow," Karina Funk, co-manager of the $1.7 billion Brown Advisory Sustainable Growth (BIAWX), told Barron's earlier this year.
In its 2Q 2019 earnings release, Danaher reported EPS that beat the consensus estimate by 2.6%. Revenues beat the estimate by 1.6%. The company is scheduled to report 3Q 2019 earnings on Oct. 24.
The software giant also is leading player in the rapidly-growing cloud computing market, with its Azure service. “We are bullish on MSFT over the next year given our thesis that Azure’s cloud momentum is still in its early days of playing out within the company’s massive installed base,” writes Daniel Ives, an analyst with Wedbush Securities, as quoted in another Barron's article. He estimates that about 32% of corporate technology workloads are cloud-based today, and he expects that figure to reach 55% by 2022, with Microsoft in a prime position to "get more of these complex workloads."
Microsoft is due to report 3Q 2019 earnings on Oct. 23. The consensus projects YOY increases of 8.8% in EPS and 10.7% in revenue.
“We think NVIDIA will be the best-performing large cap in our universe over the next 6-9 months," according to RBC Capital Markets analyst Mitch Steves, per an additional report in Barron's. He expects the semiconductor maker to increase sales to the data center market, driven by investment in machine learning applications. He also sees rebounding demand in the automotive market in mid-2020, and demand from the computer gaming market that is "tracking slightly ahead of plan." His price target is $217, implying an additional gain of about 20%.
Nvidia's GPU segment has been beset by a sharp decline in demand from data centers and from the makers of PCs, especially notebook PCs and gaming PCs, amid a slowdown in China's economy, Forbes reports. However, sales of its Tegra processors have been helped by growing demand from the automotive market for use in artificial intelligence (AI) applications. Despite a sharp gain in 2019, Nvidia stock is down by 26% over the past year.
Nvidia is due to report 3Q 2019 earnings in mid-November. The consensus projects YOY declines of 14.1% in EPS and 8.2% in revenue.
To be sure, not all companies with strong revenue growth are a sure bet. Software firm Adobe posted strong revenue growth of 24% YOY in its 3Q 2019 fiscal quarter, which ended in August, slightly above the consensus. EPS beat the estimate by 4.1%. However, the company issued negative guidance, projecting EPS and revenue in its fiscal 4Q 2019 that were both below the consensus, CNBC reports.