Finding stocks with big upside potential is becoming increasingly difficult as the bull market ages. But Goldman Sachs Group Inc. says there are plenty and has identified 30 buy-rated companies with "micro driven, idiosyncratic returns." Right now, stocks within the S&P 500 Index (SPX) are at historically high levels of correlation to broad market forces such as trade tensions and Federal Reserve rate decisions. Goldman says this "has made the environment difficult for stock pickers." To overcome that challenge, Goldman has developed a methodology to find stocks with the potential to outperform, including these seven, with the gains implied by their price targets: DISH Network Corp. (DISH) +80% to target; AbbVie Inc. (ABBV) +44%; Mylan NV (MYL) +29%; MGM Resorts International (MGM) +28%; Hasbro Inc. (HAS) +27%; Centene Corp. (CNC) +25%; and AmerisourceBergen Corp. (ABC) +25%.
Goldman's list is diverse. DISH Network is a television provider, MGM Resorts is a hotel and casino operator, and Hasbro makes toys. AbbVie and Mylan are pharmaceutical companies, Centene is a managed care company, and Amerisource Bergen is a distributor of drugs and other health care products.
According to Goldman, "S&P 500 returns have become more macro-driven during the recent market weakness. However, our dispersion scores suggest that stock-picking opportunities remain plentiful in Consumer Discretionary and Health Care." As described in their April 12 report, "U.S. Macroscope: Where to find stock-picking opportunities in a correlated market," Goldman finds that "Stocks with high dispersion scores are more likely to have heightened responses to idiosyncratic news and present the best alpha generation opportunities."
The dispersion score takes into account two measures: first, the percentage of that stock's returns during the past six months that was driven by micro factors, rather than the movement of the overall market (also known as beta), and second, Goldman's forecast of the volatility or risk associated with those micro factors. Regarding the first measure, the median S&P 500 stock had 58% of its six-month trailing returns driven by micro factors, whereas the seven stocks listed above ranged from 55% (AbbVie) to 89% (Hasbro), with the other five being between 72% and 78%.
Goldman's dispersion score for the median S&P 500 stock is 1.1, while those for the seven highlighted stocks range from 2.0 (Hasbro) to 4.8 (Centene). The other five stocks are between 2.5 and 3.4 on this measure.
Among the seven highlighted stocks, Mylan and AbbVie stand out for particularly low valuations. Their forward P/E ratios, based on Goldman's estimates, are just 7x and 12x next twelve month (NTM) projected earnings, respectively. By comparison, the forward P/E for the entire S&P 500 is 17x, per Goldman, and 16.4x per Yardeni Research Inc. The forward P/E for the S&P 500 health care sector is 15.2x, according to Yardeni.
AbbVie has been experiencing strong growth in sales, earnings, and dividends. The stock also has become a favorite of institutional investors, who have been accumulating shares. Consensus estimates call for first quarter EPS to be up by 39.8% year-over-year, and full year 2018 EPS to be up by 34.5%, per Yahoo Finance. (For more, see also: AbbVie Stock Is Signalling That a Move to the Upside Could Be Near.)
For Mylan, the EPS growth estimates are 6.5% for the first quarter and 18.0% for the full year, also per Yahoo Finance. Mylan's best-known product is the EpiPen, an emergency treatment for severe allergic reactions. This product accounted for about $1 billion of revenue as of 2015, per estimates reported by CNBC. However, the company has been under intense criticism for raising the U.S. retail list price of this device to more than $600 per two-pack, even though each device contains only $1 worth of medication, per CNBC.
The delivery device itself can be produced for no more than $30, according to the MIT Technology Review. Moreover, Consumer Reports has identified an alternative that costs just $10 per two-pack. In response to the outcry, Mylan has introduced a generic version at about half the price of the branded EpiPen. In 2017, the company paid $465 million to resolve a federal investigation that initially sought $1.27 billion of restitution for overcharges on the device, Bloomberg reported.
Bargains in Tech
The same Goldman report also focused on how the recent travails of Facebook have weighed on other tech stocks, and how this is likely to be a temporary anomaly that has created some bargains in that sector. Investopedia's article on that topic also offers more detail on Goldman's findings about the recent spike in correlations among S&P 500 stocks. (For more, see also: 10 Techs Pulled Down By Facebook Now Poised to Rise.)