By Mark Kolakowski Updated Apr 11, 2019
8 Stocks to Buy as Market Waters Get Choppy
(YTD Gains Through April 2, 2019)
- Facebook, 34%
- VeriSign, 26%
- PayPal, 24%
- Foot Locker, 22%
- Texas Instruments, 21%
- AT&T, 14%
- Western Union, 13%
- Amgen, 0%
- Median S&P 500 stock, 17%
Significance for InvestorsKostin's team looked for stocks in the S&P 500 Index (SPX) that already are included in at least two of four thematic baskets that Goldman believes are especially timely right now: low operating leverage, low labor cost, dividend growth, and high revenue growth. Each of these baskets has outperformed the S&P 500 in 2019, as detailed below.
Goldman Chose From These 4 Baskets
(YTD Gains Through April 4, 2019)
- High Revenue Growth Basket, 20%
- Low Operating Leverage Basket, 18%
- Low Labor Cost Basket, 17%
- Dividend Growth Basket, 16%
- S&P 500, 15%
"The drag on sales from a slowing economy will be less for low operating leverage stocks given they have more stable margins due to higher variable costs as a percentage of revenue," Goldman advised in a previous report. Meanwhile, wages are rising rapidly, the result of general inflation, brisk job growth, and an unemployment rate at a 50-year low, leading Goldman to recommend stocks with low labor costs. The sections immediately below indicate which baskets include the eight stocks listed above.
Low Operating Leverage: Facebook, Texas Instruments, VeriSign, Amgen.
Low Labor Cost: Facebook, Texas Instruments, VeriSign, AT&T, Western Union, Foot Locker, PayPal.
Dividend Growth: Texas Instruments, Amgen, AT&T, Western Union, Foot Locker.
High Revenue Growth: Facebook, PayPal.
Amgen is representative of the fact that recent subpar performance does not exclude a stock from Goldman's forward-looking basket of 30. In fact, 16 of the 30 have generated YTD 2019 returns below that of the median S&P stock, and four of those are down YTD.
As noted above, this biotech company is in Goldman's low operating leverage (2.0% vs. 2.6% for the median S&P 500 stock) and dividend growth baskets (10% projected annual growth rate from 2018 to 2020, vs. 6% for the S&P 500 median stock). Amgen's dividend yield of 3.0% beats the 2.0% median for the S&P 500.
Although Amgen did not make the cut for the low labor cost basket, its implied labor costs as a percentage of sales are still below the S&P 500 median, 12% vs. 14%. The big weak point for the stock is that consensus estimates point to declines of 4% in sales and 5% in EPS in 2019. However, the company has a potential blockbuster in a drug for migraine headaches, which may generate annual sales of up to $3.5 billion, per research by RBC Capital Markets cited by MarketWatch.
Looking AheadIf the recent surge in the S&P 500 represents a dangerous speculative bubble, as some observers warn, even the strongest stocks are bound to swoon when it bursts.