8 Stocks to Own in 2Q as the Market Enters Rough Waters

Stocks are up sharply from their December 2018 lows, and many investors wonder if the best opportunities for gains in equities are now behind us. Meanwhile, David Kostin, the chief U.S. equity strategist at Goldman Sachs, has applied multiple screens to produce a basket of 30 stocks with strong prospects in 2Q 2019, including these eight: Amgen Inc. (AMGN), Facebook Inc. (FB), PayPal Holdings Inc. (PYPL), Foot Locker Inc. (FL), AT&T Inc. (T), Texas Instruments Inc. (TXN), VeriSign Inc. (VRSN) and The Western Union Co. (WU).

8 Stocks to Buy as Market Waters Get Choppy

(YTD Gains Through April 2, 2019)

  • Facebook, 34%
  • VeriSign, 26%
  • PayPal, 24%
  • Foot Locker, 22%
  • Texas Instruments, 21%
  • AT&T, 14%
  • Western Union, 13%
  • Amgen, 0%
  • Median S&P 500 stock, 17%

Source: Goldman Sachs, "Where to Invest Now: Strategies for 2Q," April 2019

Significance for Investors

Kostin's team looked for stocks in the S&P 500 Index (SPX) that already are included in at least two of four thematic baskets that Goldman believes are especially timely right now: low operating leverage, low labor cost, dividend growth, and high revenue growth. Each of these baskets has outperformed the S&P 500 in 2019, as detailed below.

Goldman Chose From These 4 Baskets

(YTD Gains Through April 4, 2019)

  • High Revenue Growth Basket, 20%
  • Low Operating Leverage Basket, 18%
  • Low Labor Cost Basket, 17%
  • Dividend Growth Basket, 16%
  • S&P 500, 15%

Source: Goldman Sachs

"The drag on sales from a slowing economy will be less for low operating leverage stocks given they have more stable margins due to higher variable costs as a percentage of revenue," Goldman advised in a previous report. Meanwhile, wages are rising rapidly, the result of general inflation, brisk job growth, and an unemployment rate at a 50-year low, leading Goldman to recommend stocks with low labor costs. The sections immediately below indicate which baskets include the eight stocks listed above.

Low Operating Leverage: Facebook, Texas Instruments, VeriSign, Amgen.

Low Labor Cost: Facebook, Texas Instruments, VeriSign, AT&T, Western Union, Foot Locker, PayPal.

Dividend Growth: Texas Instruments, Amgen, AT&T, Western Union, Foot Locker.

High Revenue Growth: Facebook, PayPal.

Amgen is representative of the fact that recent subpar performance does not exclude a stock from Goldman's forward-looking basket of 30. In fact, 16 of the 30 have generated YTD 2019 returns below that of the median S&P stock, and four of those are down YTD.

As noted above, this biotech company is in Goldman's low operating leverage (2.0% vs. 2.6% for the median S&P 500 stock) and dividend growth baskets (10% projected annual growth rate from 2018 to 2020, vs. 6% for the S&P 500 median stock). Amgen's dividend yield of 3.0% beats the 2.0% median for the S&P 500.

Although Amgen did not make the cut for the low labor cost basket, its implied labor costs as a percentage of sales are still below the S&P 500 median, 12% vs. 14%. The big weak point for the stock is that consensus estimates point to declines of 4% in sales and 5% in EPS in 2019. However, the company has a potential blockbuster in a drug for migraine headaches, which may generate annual sales of up to $3.5 billion, per research by RBC Capital Markets cited by MarketWatch.

Looking Ahead

If the recent surge in the S&P 500 represents a dangerous speculative bubble, as some observers warn, even the strongest stocks are bound to swoon when it bursts.

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