Now may be the time to re-evaluate your trading strategy, says Goldman Sachs. Even though value stocks have under-performed recently- especially in comparison to growth stocks- the firm sees an opportunity to make a meaningful profit.
That’s because value stocks are now looking particularly cheap compared with the rest of the market. According to Goldman Sachs, value stocks now show a whopping 65% discount to expensive stocks based on price-to-earnings ratios.
“A wide distribution of price-to-earnings multiples has historically presaged strong value returns,” says the firm’s chief US equity strategist David Kostin.
At the same time “a rotation into value stocks would [also] require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.” That’s good news given the expected upcoming interest rate cuts by the Fed.
So for those investors who believe value stocks could make a comeback, check out the following names recommended by the firm. Not only do these cheap stocks show the highest expected returns relative to their six-month implied volatilities, but they also passed a "quality" screen for healthy balance sheet stocks.
The best part: Kostin forecasts that the median stock in this basket will deliver triple the returns of the "typical" S&P 500 company with similar implied volatility. Let’s take a closer look at 5 of these names now:
Salesforce is one of the most promising stocks highlighted by Goldman Sachs. In May the company announced that it will snap up Tableau Software (DATA) in a massive $15.7 billion deal. "We are bringing together the world's #1 CRM with the #1 analytics platform," explained Salesforce CEO Marc Benioff. "Tableau helps people see and understand data, and Salesforce helps people engage and understand customers."
The deal certainly has the Street’s seal of approval. Five-star KeyBanc analyst Brent Bracelin notes that data has increasing value as enterprises adopt cloud and digital best practices, yet >90% of the $41B data management and analytics software market is still made up of traditional data software tools designed 30+ years ago. Now with DATA under its belt, Salesforce can move to capitalize on this lucrative data modernization opportunity.
“We raised numbers on Tableau Software last week and remain bullish on the prospects for 30%+ ARR growth under Salesforce that could further elevate Tableau from a pioneer of self-service visualization into a broader analytics platform that can replace legacy business insider tools” writes Bracelin. He reiterated his buy rating and $180 price target in June, while describing Salesforce as a core, large-cap growth holding.
Overall Salesforce boasts a notably positive outlook from the Street. Its ‘Strong Buy’ consensus comes from 24 recent buy ratings, vs just 1 hold rating. Meanwhile the average analyst price target of $183 indicates upside potential of 23% from the current share price.
Facebook is another mega-cap tech stock pinpointed by Goldman Sachs. And like CRM, FB is buzzing right now. The company has just launched its new Libra cryptocurrency payment platform. Several leading financial tech and consumer services have collaborated on this revolutionary crypto platform, including Uber (UBER), Mastercard (MA) and Visa (V). The result: FB is set to become a major participant in the $1.4 trillion e-commerce marketplace
Following the launch, five-star Tigress Financial analyst Ivan Feinseth reiterated his ‘Strong Buy’ FB rating. “Libra will be a major game changer as it creates new ways to further engage with FB’s over 2.7 billion membership base” comments Feinseth.
“FB’s creation of a unified payment system for its user base will drive new business partnerships and long-term growth as it penetrates the e-commerce marketplace and further advances its ability to provide access for advertisers and additional business services” the analyst adds. Although Feinseth doesn’t publish a FB price target, he does write that “significant upside exists from current levels and [we] continue to recommend purchase.”
A similar message comes from RBC Capital’s Mark Mahaney. This five-star analyst believes that Facebook's introduction of the Libra currency marks a potential watershed moment for the company. “With 1B+ user bases across each of its Messenger and WhatsApp platforms, we believe Facebook has the potential to be a material disruptor and innovator in the payments space, especially in Emerging Markets” the analyst tells investors.
In total, 35 analysts have published buy ratings on FB in the last three months, while only 3 analysts are staying sidelined. The average analyst price target of $220 indicates 17% upside potential from current levels.
MPC is one of the largest U.S. fuels refiners while also boasting retail and midstream segments. The company’s huge $23.3 billion merger with Andeavor in late 2018 turned it into a top five global refiner with throughput capacity of more than 3 million barrels per day.
Even though the company reported weak first quarter results post the merger, analysts are staying firmly on side. MPC shows a Strong Buy Street consensus, with upside potential of over 30% to its $71 average price target. Indeed JP Morgan has just hosted its annual energy conference, and MPC was one of the participating companies. Following the event the firm’s Phil Gresh noted that:
“Management believes the industry has largely worked through the inventory problems seen in 1Q, where a better-than-expected 4Q had led to running at too high of a level of utilization. With inventories cleaning up in the April-May time period, MPC is bullish on the remainder of 2019.”
Refining indicators appear positive through to May, while 2Q retail should be strong, driven by margin uplift from falling crude prices throughout the quarter. Plus the company remains confident that Andeavor synergies are well on track. “Bottom line, we do not expect a repeat of the 1Q negative surprise” sums up Gresh.
Also in the stock’s favor comes the recent promotion of Don Templin to CFO (and EVP) from July 1. “With the announcement, we believe MPC is looking to address the need for continued transparency and guidance improvements - a key investor concern. With Mr. Templin's prior CFO experience, and having led various business units, we see the announcement as a signal of commitment to further improve disclosure” cheers Morgan Stanley’s Benny Wong.
Semiconductor stock Qualcomm also features on the Goldman list. Although the stock has had a rocky time recently, most analysts are staying onboard. The Street consensus works out at a cautiously optimistic Moderate Buy, with an average price target of $85.
Most notably, Qualcomm and Apple (AAPL) settled their long running dispute back in April- earning Qualcomm an impressive $4.5 billion. Shares jumped 23% on the news. The company also secured the right to supply modem chips to Apple for future devices. However, the celebrations ended abruptly when the FTC determined that Qualcomm’s royalty structures violated antitrust laws. Qualcomm is now appealing the decision at the U.S. Ninth Circuit Court of Appeals.
In response to the whole saga, Morgan Stanley analyst James Faucette said being a Qualcomm shareholder has "always required a bit more mettle" but at current levels the stock is "still worth the noise." Indeed, his $95 price target indicates upside potential of 27%.
Meanwhile, Cowen & Co analyst Matt Ramsay lowered his price target on QCOM from $100 to $80- but maintained his buy rating. Ramsay remains confident about Qualcomm's IP leadership into 5G, but does note that the FTC ruling raises questions about QCOM’s monetizing ability.
On the more cautious side, comes Timothy Arcuri of UBS. He has a Hold rating on the stock but writes: "We emerge confident about our $80 PT (~20% upside from current levels). Given solid 5G leadership + expanding silicon TAM (especially RF), we can envision a path for this to ultimately prove conservative, but it is still hard to get comfortable around potential near- or medium-term EPS impact from the range of legal outcomes – even as QCOM is confident about its legal strategy.”
Our last stock pinpointed by Goldman Sachs is Halliburton, one of the world's largest oil field service companies with operations in over 70 countries. In the last three months, six analysts have rated HAL a buy vs just 1 hold rating. What’s more the $41 average price target suggests shares can surge by 75%.
"We view Halliburton as the having the highest leverage to the growing commodity upcycle among large-cap peers and remains our highest-conviction large cap name” enthuses Raymond James analyst Praveen Narra. The analyst has a ‘Strong Buy’ rating on the stock, and sees prices almost doubling from current levels.
According to Narra, investors should have confidence that results will improve in 2H19 and into 2020. He believes that the North American business has troughed, and that international is undergoing a long-term recovery. As a result, the analyst sees significant positive pricing coming Halliburton’s way, with better utilization of under-absorbed capacity boosting margins.
Notably Morgan Stanley’s Connor Lynagh offers a similar message, telling investors that profitability should improve through the rest of the year. With this in mind, Lynagh upwardly revised the EBIT forecasts significantly for both Halliburton's North American-heavy Completion and Production business and its Drilling & Exploration business.
