Investors who are eager to find stocks that can lead the market in the midst of escalating political uncertainty and slowing economic growth should consider the new "Stable Growers" basket of 50 stocks assembled by Goldman Sachs. These stocks usually beat the market averages in precisely those challenging macro conditions. This is the first of two stories that Investopedia will devote to Goldman's report, the second to come on Thursday.
"Investors usually assign a valuation premium to stocks with historical EBITDA growth stability. But the powerful rotation to stable growth companies has expanded the valuation gap to the widest level in at least 35 years. Investors should generally tilt portfolios away from volatile growth stocks which have consistently lagged the market," Goldman writes in the latest edition of its US Weekly Kickstart report.
Among the 50 stable growth stocks identified by Goldman are these 7: AutoZone Inc. (AZO), Home Depot Inc. (HD), Colgate-Palmolive Co. (CL), Walmart Inc. (WMT), Costco Wholesale Corp. (COST), Dunkin' Brands Group Inc. (DNKN), and Comcast Corp. (CMCSA). Goldman's basket includes stocks from all market sectors. The 7 listed above are in consumer discretionary, consumer staples, and communication services.
- Goldman Sachs recommends stocks with stable longterm profit growth.
- These usually thrive as uncertainty rises and economic growth falters.
- More volatile growth stocks are now lagging the market.
Significance For Investors
"During the past 2 years, stable growth stocks with historical EBITDA growth stability have outperformed volatile growth firms (+22% vs. +1%)," Goldman notes. Looking at EBITDA over the past 10 years, the median stock in the stable growth basket has shown only 31% as much variability as the median stock in the Russell 1000 Index.
Additionally, analysts' estimates of EPS for the next fiscal year are about half as dispersed for the median stock in the stable growth basket as they are for the median Russell 1000 stock. In other words, there is a much tighter consensus, or much higher confidence, surrounding projected EPS growth for stable growth stocks.
For year-to-date 2019, through the close on Oct. 3, the median stable growth stock has posted a 22% gain, versus a 19% gain for the median Russell 1000 stock. Regarding valuation premiums, the median stable growth stock has a forward P/E ratio of 22 times next 12 months earnings, compared to 17 times for the median Russell 1000 stock.
Home improvement superstore chain Home Depot has shown even more stable EBITDA growth over the past 10 years than the median stock in the basket, as well as an even tighter consensus among analysts regarding EPS in its next fiscal year. Analysts have been impressed by new CFO Richard McPhail, a veteran financial executive at the company, as well as by a strong 2Q earnings report in spite of headwinds from the U.S.-China trade war, Barron's reports.
"We continue to view HD among the long-term winners in retail, with strong management/execution, ample growth drivers and [market] share gaining opportunities in an attractive category that remains highly fragmented,” analyst Zachary Fadem has written, as quoted by Barron's. Shares of Home Depot are up by nearly 35% for the year-to-date through the close on Oct. 8, based on adjusted closing prices.
Retailing colossus Walmart also been better than the median stock in the basket regarding historically stable EBITDA growth and a tight consensus about future EPS growth. While many traditional brick-and-mortar retailers struggle in the face of rising online competition, Walmart has been increasing sales and market share alike. The company even raised its profit guidance after posting strong 2Q 2019 results.
Sales generated by Walmart's U.S. stores and websites that were in operation for at least 12 months were up by 2.8% year-over-year, with groceries being a particular source of strength, per The Wall Street Journal. U.S. e-commerce sales surged 37% YOY.
“We’re gaining market share. We’re on track to exceed our original earnings expectations for the year,” Walmart CEO Doug McMillon said in press release quoted by the Journal. The company had forecasted same store sales in the U.S. to grow by 2.5% to 3.0% in the current fiscal year, but now expects to be in the upper end of that range.
Analysts are forecasting an overall EPS decline of about 4% among S&P 500 stocks on a YOY basis for 3Q 2019, as rapidly rising costs offset revenue growth. Investors will be looking closely to see if Goldman's stable growth stocks can defy this macro trend.