Stock pickers have had a rough time of late, given that individual stocks within the S&P 500 Index (SPX) are exhibiting historically high levels of correlation to each other, being driven more by general economic and political concerns than by company-specific results and outlooks. Goldman Sachs Group Inc. (GS) believes that, in this environment, building a portfolio that outperforms the broader market requires finding stocks that still exhibit "micro driven, idiosyncratic returns."
Investopedia previously discussed seven of Goldman's picks, as well as their research findings and theoretic framework. Here are nine more: Noble Energy Inc. (NBL), Molson Coors Brewing Co. (TAP), Broadcom Inc. (AVGO), Tyson Foods Inc. (TSN), Autozone Inc. (AZO), eBay Inc. (EBAY), Freeport-McMoRan Inc. (FCX), Incyte Corp. (INCY) and Align Technology Inc. (ALGN). (For more, see also: 7 Stock Picks With Giant Upside: Goldman.)
As the earlier Investopedia report discussed in detail, Goldman has created what they call a "dispersion score," which attempts to capture a given stock's sensitivity to company-specific factors, as opposed to general market forces. The median S&P 500 has a score of 1.1, while the 2.5 is the score for the median entry on Goldman's list of 30 buy-rated, high dispersion stocks. For the nine stocks listed above, here are their dispersion scores, along with the gains implied by Goldman's target prices:
- Noble: 1.6, +45%
- Molson Coors: 1.6, +41%
- Broadcom: 2.5, +40%
- Tyson: 1.8, +37%
- Autozone: 2.0, +35%
- eBay: 1.9, +23%
- Freeport-McMoRan: 3.1, +28%
- Incyte: 8.9, +46%
- Align: 6.6, +25%
This data, as of April 11, comes from Goldman's April 12 report entitled "U.S. Macroscope: Where to find stock-picking opportunities in a correlated market."
Expect Mean Reversion
"Stock correlations are mean-reverting and we expect they will fall given the idiosyncratic nature of policy risks," Goldman says. They add: "We expect correlations will move lower as policy risks create relative winners and losers. Average stock correlations are generally mean-reverting. We expect policy uncertainty will remain high in the U.S. this year amid trade and regulatory risks and the upcoming midterm elections."
Volatility and Dispersion
The interplay between volatility and dispersion has been unusual this year, Goldman indicates. They write: "Return dispersion is lifted by high volatility or low correlation, all else equal. Although equity volatility has picked up YTD, stock correlations have risen substantially as well, constraining return dispersion." Stock correlations have jumped by 43 percentage points since January, from 9% to 52%, Goldman calculates. Meanwhile, volatility has risen by 24%, whereas an increase of 36% would have been more in line with historical relationships between the two measures.
Goldman expects that correlations will fall in 2018, sending return dispersion upward. However, since they do not forecast a bear market or a recession this year, they do not believe that volatility will surge by enough to push return dispersion significantly above its long-term average.
Other Investment Themes
Several of the above stocks look attractive on the basis of forward P/E ratio and/or PEG ratio based on 5-year expected earnings growth. Here are these figures for those stocks, perYahoo Finance, and including consensus forecasts of EPS growth for 2018 and 2019:
- Noble: 29.9x, 0.78, +168%, +36%
- Broadcom: 11.4x, 0.88, +24%, +5%
- Tyson: 10.1x, 0.94, +24%, +4%
- Freeport McMoRan: 13.5x, 0.32, +83%, -33%
Shares of Broadcom are likely to be boosted by a large stock repurchase program. (For more, see also: Record Stock Buybacks Will Fire Up the Bull Market.)
While not cheap based on P/E or PEG analysis, Align Technology has been cited by Goldman as meeting one of their favorite criteria, fast revenue growth. (For more, see also: 9 Stocks Fueled By High-Octane Sales Growth.)
Molson Coors fits with a tactical trading strategy developed by Goldman that relates to its high level of floating rate debt. (For more, see also: 12 Stocks for Short-Term Gains in a Wild Market.)