Stocks with the fastest expected growth in ROE delivered a total return that beat the S&P 500 Index (SPX) by 500 basis points for the year-to-date through July 18, 2019, 26% versus 21%, per Goldman Sachs. "Amid concerns about the growth and profitability outlook this year, investors have assigned a premium to companies able to expand ROE," Goldman says in their current U.S. Weekly Kickstart report. Their basket of stocks with high forecasted ROE growth "typically outperforms in weakening growth environments as investors assign a scarcity premium to firms that are able to expand ROE despite sector-level headwinds."
Goldman says these 8 stocks have the highest projected ROE growth rates: Cisco Systems Inc. (CSCO), 34%; Apple Inc. (AAPL), 40%; Under Armour Inc. (UAA), 47%; Fidelity National Information Services Inc. (FIS), 25%; Sempra Energy (SRE), 32%; Global Payments Inc. (GPN), 31%; Nielsen Holdings PLC (NLSN), 29%; and DXC Technology Co. (DXC), 28%. These are projected growth rates in ROE, not the current or forecasted ROE figures.
Significance For Investors
The median stock in Goldman's basket is projected to increase ROE by 9% and has a price to book value (P/B) ratio of 4.4 times book. For the median S&P 500 stock, the respective figures are 2% and 3.3 times book.
Forward ROEs are 17% for the median constituent of the basket and 18% for the median S&P 500 stock. For the 8 stocks listed above, the forward ROEs are: Cisco, 47%; Apple, 79%; Under Armour, 11%; Fidelity National, 12%; Sempra, 10%; Global Payments, 17%; Nielsen, 27%; and DXC Technology, 13%.
There are 10 information technology stocks among the 50 in the basket, and 7 each from financial services and health care. Among the top 11 in terms of YTD total return are Global Payments, 62%, Under Armour, 53%, and Cisco, 36%.
Global Payments is riding the worldwide trend toward cashless payments. They operate in 30 countries, support 2.5 million merchant locations and process 11 billion transactions worth $550 billion, per their website. Consensus estimates are calling for year-over-year (YOY) revenue growth of 12.6% for 2Q 2019, and 13.2% EPS growth, with a scheduled reporting date of July 30, per Yahoo Finance.
Cisco Systems is a leader in computer networking products. Its expected earnings reporting date is Aug. 14, and the consensus calls for YOY increases of 4.2% in revenues and 17.1% in EPS, per Yahoo Finance. Cisco holds a 47% share of the SD-WAN (software defined wide area network) equipment market, and enjoyed robust 55% YOY sales increase in 2018, per research firm IDC, which projects this market to grow at a compound annual rate (CAGR) of 31% through 2023.
Companies use SD-WAN technology to connect far-flung offices and data centers. It also is used in telecommunications services networks. SD-WAN technology also allows companies to optimize connections to cloud-based services, another rapidly growing market. In a separate development, British telecom company BT Group is partnering with Cisco to develop an internet peering network, Seeking Alpha reports.
"The path forward for [S&P 500] index ROE is likely to be challenging, although lower interest rates and lower tax rates may provide support," Goldman says. On the matter of weakening growth, their U.S. Current Activity Indicator slowed from 1.7% at the start of 2019 to 1.1% in June.
Goldman believes that the S&P 500 is at a fair value relative to interest rates and profitability. However, they warn that "policy uncertainty and negative revisions to 2020 EPS forecasts will limit equity upside."