Goldman Sachs Group Inc. (GS) finds that companies investing the most for growth have outperformed companies sending the most cash to shareholders by 21 percentage points since the start of 2016, and 11 percentage points for year-to-date 2017. The 50 stocks in the S&P 500 Index (SPX) that Goldman rates as investing heavily for growth include these nine: Advanced Micro Devices Inc. (AMD), Micron Technology Inc. (MU), Intel Corp. (INTC), HP Inc. (HPQ), Deere & Co. (DE), HCA Healthcare Inc. (HCA), Bristol-Myers Squibb Co. (BMY), MGM Resorts International (MGM) and Wal-Mart Stores Inc. (WMT). This is per Goldman's U.S. Weekly Kickstart report dated October 27.
Among the attractive fundamentals for Goldman's investing for growth basket is a lower median forward P/E ratio than that for non-financial S&P 500 stocks overall, 14x versus 21x. Even lower than this are: Micron, 5x; HCA, 10x; HP, 12x; and Intel, 13x. Meanwhile, Deere is at 19x, whereas both Wal-Mart and Bristol-Myers are at 20x.
AMD is trading at a pricey 46x, but Goldman is projecting 161% EPS growth and 12% sales growth in 2018, versus respective median figures of 10% and 5% for non-financial S&P 500 companies. Meanwhile, MGM has a forward P/E of 26x, but Goldman is forecasting 20% EPS growth and a 12% revenue increase. Also, Goldman has a one-year price target of $41 for MGM, per Seeking Alpha, 33% above its open on Thursday.
In addition to an attractive valuation, Micron also is projected by Goldman to generate strong EPS and revenue growth in 2018, at 24% and 14%, respectively.
The median company in Goldman's investing for growth basket invests three times as much as does the median non-financial S&P company, whether as a percentage of sales or of market cap. Goldman defines spending for growth as the sum of R&D expenditures and capital expenditures. The companies in this basket spent 20% as a percentage of sales and 12% as a percentage of market cap, versus 7% and 4%, respectively, for the median S&P 500 company.
Reversal of Trend
While the basket of stocks with the highest combined dividend and share repurchase yields has underperformed the investing for growth basket recently, this represents a reversal of a long-term trend. Since 1991, Goldman finds that the high cash return basket has outperformed the high investing for growth basket by an annualized 170 basis points. Nonetheless, Goldman expects the recent trend to continue into 2018, with companies investing for growth outperforming. The main reason, they say, is that the average asset age is 16 years, the oldest that it has been in more than five decades. Against this backdrop, corporate spending to position for future growth has a particular urgency, and Goldman believes that companies doing so will profit.