In an uncertain market, investors are desperate to isolate those factors most likely to propel future stock price gains. While some investors focus on companies with big share repurchase programs, Goldman Sachs Group Inc. (GS) disagrees, writing, "We believe cash return strategies will lag going forward." Instead, Goldman advises: "Companies focused on capex in 2018 are well-positioned to deliver future growth and are scarce compared with stocks returning cash to shareholders. Firms investing in capex and R&D tend to outperform during rising interest rate environments, which is our forecast for 2018."
Goldman has assembled a basket of 50 stocks with the highest ratio of combined capital expenditures and R&D outlays to market capitalization. From the 2016 presidential election through April 19, this basket was up by 42%, versus a 30% gain for the S&P 500 Index (SPX) as a whole, per Goldman's U.S. Weekly Kickstart report dated April 20.
Among the stocks in this basket are these eight: FedEx Corp. (FDX), Newfield Exploration Co. (NFX), Whirlpool Corp. (WHR), The Mosaic Co. (MOS), Nektar Therapeutics (NKTR), Kohl's Corp. (KSS), American Airlines Group Inc. (AAL) and Intel Corp. (INTC).
- FedEx: 15x P/E, +32% EPS, +8% sales, 11% Capex + R&D divided by Market Cap
- Newfield: 9x, +41%, +28%, 19%
- Whirlpool: 10x, +9%, +4%, 10%
- Mosaic: 17x, +46%, +17%, 9%
- Nektar: 133x, NM, +84%, 10%
- Kohl's: 12x, +22%, 0%, 10%
- American Airlines: 8x, +17%, +7%, 27%
- Intel: 15x, +2%, +4%, 15%
Forward P/E ratios are on a next-12-month (NTM) basis. The median stock in the basket has a forward P/E of 13 times NTM earnings, forecast 2018 growth of 14% for EPS and 6% for sales and its ratio of capex and R&D spending to market cap is 11%. By comparison, the median figures for non-financial companies in the S&P 500 are 21 times, 15%, 7% and 4%, respectively, per Goldman.
Ongoing Investment Theme
Goldman notes that this basket outperformed the S&P 500 by 10 percentage points in 2017 but has lagged the broader index by 1 percentage point for 2018 through April 19. Nonetheless, as noted above, Goldman believes that this recent underperformance is a temporary phenomenon.
Earlier this year we looked at another variation of this analysis by Goldman. In that report, Goldman found that companies with high ratios of capex and R&D spending to cash flow from operations had been outperforming the S&P 500, while also having higher forecasted growth in sales and EPS than the index as a whole. (See also: 9 Stocks That Can Outperform As Bull Market Ages.)