Despite major market headwinds, Goldman Sachs says a long list of stocks have huge upside over the next year, including 7 stocks with superior potential implied by their target prices. These stocks are expected to benefit disproportionately as the broader market rises in 4Q. David Kostin, Goldman's chief U.S. equity strategist, expects a rally that will send the S&P 500 Index to 3,100 by the end of 2019, for a gain of 5.5% from the close on Oct. 7, Business Insider reports.
If that rally emerges as predicted, among the stocks that would benefit include, with their approximate upsides: Vertex Pharmaceuticals Inc. (VRTX), +50%, Discovery Inc. (DISCA), +50%, Schlumberger Ltd. (SLB), +52%, Concho Resources Inc. (CXO), +53%, American Airlines Group Inc. (AAL), +59%, Under Armour Inc. (UAA), +65%, and Align Technology Inc. (ALGN), +75%, per Business Insider.
- Goldman Sachs projects a stock market rally in 4Q 2019.
- This is despite macro uncertainties and falling 3Q earnings.
- Goldman has identified bargain-priced stocks with large upsides.
- If the market does rally, these stocks should get an extra boost.
Significance For Investors
The upsides listed above represent the differences between Goldman's 12-month price targets and the closing prices of these stocks on Sept. 30, the last day of 3Q 2019. Kostin sees uncertainties fostered by the unresolved trade war between the U.S. and China as a major factor behind the sideways movement of the stock market in recent months, per a note to clients cited by BI.
"Mixed economic data and mounting political uncertainty" characterize the current macro environment, according to the latest edition of Goldman's US Weekly Kickstart report. The ISM Manufacturing Index fell in both August and September, sinking to its lowest reading since March 2009, which was during the Great Recession of 2007-2009, and the month when the last bear market hit bottom.
On the other hand, Goldman notes that hiring is proceeding at a brisk pace, with 136,000 new jobs in September. The unemployment rate is down to 3.5%, a 50-year low. This should bolster consumer spending, which represents about 68% of U.S. GDP.
Other analysts beyond Goldman see upward potential in several of these stocks.
Shares of oil services company Schlumberger were 50% below their 52-week high as of the close on Oct. 7. Connor Lynagh, an analyst with Morgan Stanley, also has rated the stock a buy, with a price target of $51, or 60% above the Oct. 7 close, per a report in Barron's. New CEO Olivier Le Peuch, in that role since Aug. 1, is focusing on increasing profit margins, free cash flow, and returns on capital, the latter partly through making the company less capital-intensive.
Additionally, Lynagh sees Schlumberger's global footprint as a positive, forecasting that overseas spending on oil services will rise after years of weakness. Finally, he expects the company to maintain its dividend, currently yielding 5.4%. “I’m personally committed to dividends,” Le Peuch has asserted, per Barron's. “I will not be the first CEO to step back from this commitment," he added.
American Airlines has been beset by a number of problems, among them maintenance issues, the grounding of the 737 MAX jet that led to 7,800 canceled flights and a $175 million hit to pretax income in 2Q 2019, heated negotiations with the mechanics union, and bad service rankings in areas such as on-time performance and lost luggage. Reflecting these woes, the stock is down by 36% from its 52-week high, but trades at an attractive forward P/E of only 5 times projected earnings over the next 12 months.
"At this valuation level, we believe investors are more than compensated for lower [profit] margins and a riskier balance sheet,” as Jamie Baker, an analyst with JPMorgan, wrote in a recent report, as quoted in another Barron's article. He calls American a buy, and has a price target of $40, for a gain of almost 55%. The stock yields 1.6%.
Regarding corporate earnings, 3Q reports are widely expected to produce an aggregate decline in S&P 500 profits versus the same period in 2018 of about 4%. However, the median company in the S&P 500 is projected to post a 3% year-over-year profit increase, Goldman notes. Rising costs, especially wages, are a major headwind for profits, increasing faster than revenues in a number of industries. That could hinder the 4Q rally that Goldman is forecasting.