Investors searching for stocks that are likely to outperform for the long term, even amid turbulent markets, should consider a group of fast-growing companies recently recommended by Goldman Sachs Group Inc. (GS
“Since 1980, high growth stocks have outgained their low growth peers in 50% of months. Following months in which growth stocks outperformed, however, that monthly hit rate was slightly above average,” according to Goldman’s US Weekly Kickstart report dated March 16. The median stock on Goldman’s list of 50 fast growers has a projected long-term EPS growth rate of 20% and a forward P/E ratio of 24 times earnings, versus figures of 11% and 17 times for the median S&P 500 Index (SPX) stock.
‘Less Positioning Risk in Growth Stocks’
“Tilts toward Growth in the average mutual fund and hedge fund portfolios fell during 4Q 2017,” Goldman indicates, adding, “those exposures have continued to decline this year.” Wrapping up, they say: “The three-month correlation between our Growth factor and our Hedge Fund VIP basket pair has declined from 0.6 at the start of the year to 0.4 today, and now sits close to the average during the past decade. Correlations with our mutual fund baskets have similarly declined, suggesting less positioning risk in growth stocks.”
Goldman seems to imply that fund managers are shifting from growth stocks to value stocks, anticipating that the recent outperformance of growth is about to end. Goldman disagrees, as described in detail in the earlier Investopedia article.
Also, the comments above indicate that fund managers are reducing their holdings of stocks on Goldman’s list of fast growers. This has three implications for the list as a whole, if not for every one of the 50 stocks. First, Goldman is suggesting that they are not especially overbought by fund managers. Second, if so, this leads to the conclusion that their prices are not unduly inflated by overbidding from fund managers. Third, the potential downward pressure on their prices, should fund managers decide to sell, probably is diminished.
Ulta is even more attractive than the median stock on Goldman’s high growth list, with a 25% forecasted EPS growth rate and a forward P/E of 19 times earnings. Billing itself as the largest beauty retailer in the U.S., the company is a specialty retailer of cosmetics, fragrances, skin and hair care products, with the added wrinkle of offering full salon services in each store.
Oil and gas exploration company EOG Resources is far ahead of the list’s median for EPS growth, with an 89% estimated rate, while its forward P/E is right at the median of 24 times. Projected long-term sales growth, per Goldman, is a robust 52%, far ahead of the list median of 23% and the S&P 500 median of 7%.
EOG has a unique approach to picking drilling sites, looking for premium sites that would produce an after-tax real rate of return in excess of 60% even if the price of oil drops to $50 per barrel. The spot price of benchmark West Texas Intermediate (WTI) crude closed at $65.88 on March 23, per OilPrice.com.
Semiconductor manufacturer Micron is ultra-cheap at a forward P/E of just 6, and its EPS growth rate is an above-average 27%. Projected long-term sales growth also is considerably above the median for the list, at 57%.
“Semiconductors are an inexpensive way to play a lot of the best secular trends in technology,” says veteran tech fund manager Paul Wick. He’s impressed not just by Micron’s spectacular sales growth, which has reached 100% in some recent periods, but also by its widening operating margins.
Banking and wealth management firm Comerica also is above average in Goldman’s group of 50 high growth stocks. Its EPS growth rate is 29%, while it trades at a relatively cheap 15 times forward earnings. Super regional banks such as Comerica, with assets between $50 billion and $100 billion, are expected to be the biggest winners of a recent rewriting of the Dodd-Frank Financial Reform Bill that eases regulation of banks with less than $250 billion of assets, Investor’s Business Daily reports.