By Mark Kolakowski Updated Jan 31, 2019
U.S. stocks surged in the afternoon of Wednesday, Jan. 30 on the news that the Federal Reserve would hold its benchmark interest rate steady. "The case for raising rates has weakened somewhat," said Fed Chairman Jerome Powell, as quoted by The Wall Street Journal. The impact should be positive for all three Goldman baskets.
The table below lists three representative stocks in each of these baskets. This is the first of two stories on Goldman's baskets. The second will come on Thursday afternoon.
3 Winning Goldman Portfolios
(Total Return YTD, Representative Stocks)
Significance For InvestorsThe baskets listed above have posted the biggest YTD 2019 total returns of the 39 thematic and sector baskets from Goldman that trade in real time on Bloomberg and Marquee. Below are details on these three baskets.
High Revenue Growth. This basket contains 50 S&P 500 stocks with the highest expected revenue growth in 2019 based on consensus estimates. These companies are poised to raise earnings based on sales increases, rather than through profit margin expansion.
The median stock in this basket has 11% expected revenue growth in 2019 and 12% EPS growth, versus 5% and 8%, respectively, for the median S&P 500 stock. The three highlighted stocks above have projected revenue growth rates of 23% or more.
High Sharpe Ratio. This group includes 50 S&P 500 stocks with the highest prospective risk-adjusted returns. Prospective returns were calculated based on the gains implied by the consensus price targets on each stock. The measure of risk was the implied price volatility on each stock using options contracts expiring six months ahead.
The median stock in this basket has almost double the expected return of the median S&P 500 stock, 32% vs. 17%, with only marginally higher expected 6-month implied volatility, 31% vs. 28%. The three illustrative stocks have ratios of expected returns to implied volatility that are at least 30% higher than the median stock in the basket.
Dual Beta. This group includes the 50 stocks with the highest combined beta, or positive correlation, with both the U.S. economy and the S&P 500. For the economy, Goldman uses the U.S. MAP index economic data surprises, which compares how actual data deviated from consensus forecasts among economists.
In essence, this basket should outperform the market as long as economic data exceeds expectations and the S&P 500 as a whole rises. Otherwise, it should underperform the market. The median stock in this basket is almost three times more sensitive to these two factors than the median S&P 500 stock. Industrial stock Fluor is four times more sensitive than the median S&P 500 stock, artificial heart maker ABIOMED is five times, and energy company Newfield is seven times.
Looking AheadThe January rally made many portfolios look good, including all 39 of Goldman's baskets. The real test will come should the market decline.