9 Stocks That Can Outperform As Bull Market Ages: Goldman

Investors should look to companies that invest heavily to enhance their future growth prospects, according to research by Goldman Sachs Group Inc. (GS). In 2017, their basket of 50 stocks with the highest ratios of R&D spending and growth capital expenditures to cash flow from operations outperformed the S&P 500 Index (SPX) by 200 basis points, 24% to 22%.

Looking ahead to 2018, Goldman finds that companies in this basket have higher forecasted sales and EPS growth than the S&P 500 as a whole. That may provide an important edge to investors, given that Goldman forecasts that the S&P 500 will reach 2,850 in 2018, just 4.8% above its open on January 5.

Nine Stocks to Watch

Goldman also projects that the median stock in this basket will beat the median S&P 500 stock by 500 basis points, 16% to 11%, along the dimension of expected cash return on cash invested (CROCI), which compares EBITDA to the total value of equity.

Among the 50 stocks in their High Growth Investment Ratio basket are these nine, with their three-year growth investment ratios (GIR), actual 2017 returns, and 2018 CROCI projections:

• Netflix Inc. (NFLX): 398% GIR, 55% 2017 return, 3% CROCI
• Amazon.com Inc. (AMZN): 99% GIR, 56% 2017 return, 21% CROCI
• Costco Wholesale Corp. (COST): 37% GIR, 22% 2017 return, 15% CROCI
• Bristol-Myers Squibb Co. (BMY): 202% GIR, 8% 2017 return, 24% CROCI
• Eli Lilly & Co. (LLY): 121% GIR, 18% 2017 return, 19% CROCI
• Nvidia Corp. (NVDA): 105% GIR, 82% 2017 return, 67% CROCI
• Qualcomm Inc. (QCOM): 73% GIR, 2% 2017 return, not meaningful CROCI
• Micron Technology Inc. (MU): 72% GIR, 88% 2017 return, 27% CROCI
• American Airlines Group Inc. (AAL): 77% GIR, 12% 2017 return, not meaningful CROCI

The source for this data was the January 2 edition of Goldman Sach's U.S. Weekly Kickstart report. Their basket is assembled on a sector neutral basis. The median stock therein has a GIR of 91% compared to a median of 18% for the S&P 500, per Goldman.

Imperative For Investment

In a previous report, Goldman found that its High Growth Investment Ratio basket has, since the start of 2016, significantly outperformed stocks that send the most cash to shareholders in the form of dividends and share repurchases. They expect that trend to continue into 2018. 

Given that assets held by U.S. corporations now have the greatest average age seen in more than five decades, Goldman see a particular urgency to modernizing, and believes that companies doing so will profit. They also found that their high investing for growth stocks tend to have a lower median forward P/E ratio than non-financial S&P 500 companies as a whole. Note that Goldman changes the components of its baskets periodically. (For more, see also: 9 Stocks Outperforming by Investing in Growth: Goldman.)