As trade tensions rise on news of an additional $200 billion in tariffs on Chinese imports proposed by the White House, the S&P 500 has continued to be supported by healthy corporate profitability, as outlined in the July 13 Goldman Sachs U.S. Weekly Kickstart report. The investment bank highlighted 25 stocks that have high net margins and return on assets (ROA), expecting these plays to outperform the broader market as profit growth decelerates due to rising interest rates and as the one-time boost from the Republican tax overhaul wears off.
"With the economy at full employment, higher wages and rising input costs will pose downside risks to gross margins," wrote Goldman. "These firms are profitable from both an earnings and an asset productivity perspective and are well-positioned as margin expansion slows."
The median company in Goldman's list is forecasted to post a ROA of 22% and net profit margins of 24% this year, versus a ROA of 8% and net profit margin of 12% for the S&P 500. Tech companies account for two in three stocks on the Goldman Sachs list.
"These firms are profitable from both an earnings and an asset productivity perspective and are well-positioned as margin expansion slows," Goldman says.
In this first part of a two-part series, Investopedia looks at eight tech stocks out of Goldman's group of 25 equities that have dramatically beaten the market year-to-date (YTD), which also have high ROAs. Our picks include: Adobe Systems Inc. (ADBE), Facebook Inc. (FB), Intuit Inc. (INTU), Micron Technology Inc. (MU), Nvidia Corp. (NVDA), Skyworks Solutions Inc. (SWKS), Texas Instruments (TXN) and VeriSign Inc. (VRSN). (For more, see also: 'Stealth Bull Market' May Push Stocks to New Highs.)
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Adobe Soaring on the Cloud Revolution
San Jose, Calif.-based software giant Adobe has been rewarded for its leadership position in the high flying digital content imaging market. Sales have skyrocketed to over $7 billion from $4 billion over the past five years, with profits growing even faster as the company doubles down on its transition to a cloud-based, recurring revenue business model. The firm posted profits of $3.43 per share in 2017, up from $0.58 in 2013, and has room to build out its subscription services, which accounted for 84% of sales last year, compared to 67% in 2015. (For more, see also: Adobe Acquires Shopify Rival Magento for $1.7B.)
Facebook Provides Best ROI for Advertisers
Social media pioneer Facebook, despite its drop off in March on its headline data scandal involving Cambridge Analytica, has seen its stock rally to new highs on improving prospects for its bread-and-butter advertising business. The firm has successfully hedged against the threat of new competition from companies like Snapchat parent Snap Inc. (SNAP), and has improved its platform with a focus on video and e-commerce integration. In a note to clients earlier this wek, Jefferies analysts forecasted the Silicon Valley giant to beat the Street's estimates in Q2, writing that Facebook has continued to "deliver best-in-class capabilities for advertisers" and has been able to lift pricing for its ads as a result.