9 Stocks Poised to Outperform as the Bull Market Matures: Insights from Goldman Sachs
Discover the top stocks with strong R&D and capital investments that Goldman Sachs identifies as likely to outperform the market in 2018.
Investors aiming for superior returns should focus on companies that prioritize heavy investment to fuel future growth, reveals research from Goldman Sachs Group Inc. (GS). In 2017, a curated group of 50 stocks with the highest ratios of research & development (R&D) spending and growth capital expenditures relative to cash flow from operations outpaced the S&P 500 Index (SPX) by 200 basis points, delivering a 24% return compared to the S&P's 22%.
Looking forward to 2018, Goldman Sachs highlights that these companies are projected to achieve stronger sales and earnings per share (EPS) growth than the overall S&P 500. This growth potential could offer investors a critical advantage, especially as Goldman forecasts the S&P 500 to close at 2,850 by year-end, a modest 4.8% increase from its January 5 opening level.
Top Nine Stocks to Monitor
Goldman further estimates that the median stock within this high-growth investment group will outperform the median S&P 500 stock by 500 basis points, boasting expected cash return on cash invested (CROCI) of 16% versus 11%. CROCI measures EBITDA relative to the total equity value, indicating operational efficiency and profitability.
Among the 50 stocks in Goldman’s High Growth Investment Ratio basket, here are nine notable picks along with their three-year Growth Investment Ratios (GIR), actual 2017 returns, and 2018 CROCI forecasts:
- Netflix Inc. (NFLX): 398% GIR, 55% return in 2017, 3% CROCI
- Amazon.com Inc. (AMZN): 99% GIR, 56% return in 2017, 21% CROCI
- Costco Wholesale Corp. (COST): 37% GIR, 22% return in 2017, 15% CROCI
- Bristol-Myers Squibb Co. (BMY): 202% GIR, 8% return in 2017, 24% CROCI
- Eli Lilly & Co. (LLY): 121% GIR, 18% return in 2017, 19% CROCI
- Nvidia Corp. (NVDA): 105% GIR, 82% return in 2017, 67% CROCI
- Qualcomm Inc. (QCOM): 73% GIR, 2% return in 2017, CROCI not meaningful
- Micron Technology Inc. (MU): 72% GIR, 88% return in 2017, 27% CROCI
- American Airlines Group Inc. (AAL): 77% GIR, 12% return in 2017, CROCI not meaningful
This data originates from Goldman Sachs’ January 2 U.S. Weekly Kickstart report. The basket is constructed with sector neutrality in mind. Median GIR for stocks in this group stands at 91%, compared to the S&P 500 median of 18%, underscoring their aggressive investment stance.
Why Investing in Growth is Crucial
Goldman’s prior analysis revealed that since early 2016, this High Growth Investment Ratio basket has significantly outperformed stocks that prioritize returning cash to shareholders through dividends and share buybacks. The firm anticipates this trend will persist throughout 2018.
With U.S. corporate assets now at their oldest average age in over 50 years, Goldman Sachs emphasizes an urgent need for modernization. Companies embracing this rejuvenation are positioned to reap substantial benefits. Additionally, these high-growth investors typically exhibit a lower median forward price-to-earnings (P/E) ratio than the broader non-financial S&P 500 companies, indicating potential undervaluation. Note that Goldman periodically updates the composition of its investment baskets.
For more insights, see also: 9 Stocks Outperforming by Investing in Growth: Goldman.
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