Goldman loves these underperforming stocks with strong fundamentals
Stocks that have missed out on this year’s market rally could be solid contenders for a rebound, according to Goldman Sachs. The major averages have had a rocky start to April, but they kicked off 2024 on a strong note. The S & P 500 jumped more than 10% in the first quarter. Heading into the second quarter, Goldman searched for buy-rated names in its coverage universe that could win big going forward. “We see potential for these names to ‘catch-up’ as our economists’ above consensus growth view continues to play out,” the bank wrote. Goldman screened for “compounders,” which offer investors high financial returns, free cash flow generation, margin expansion and sales growth. The names had to meet the following criteria: Lag their benchmarks by at least 5% in the past year; Have at least 5% compound annual growth rate for sales between 2023 and 2025, estimated; Have at least 5% compound annual growth rate for EBIT between 2023 and 2025, estimated; Have free cash flow and net interest margin expansion between 2023 and 2025; Have high single-digit cash return on capital invested. Here are a few of the stocks on Goldman’s list: One name on the list was automotive component manufacturer Aptiv . Most analysts covering the stock currently have a buy rating assigned to the name, with about 39% upside to the consensus price target, per LSEG. Barclays analyst Dan Levy reiterated his overweight rating on Aptiv last month. While the stock has slid 16% so far this year and has had a disappointing past two years, Levy still believes it presents an attractive investment case. “We think the bull case is fairly obvious, with APTV’s product portfolio representing one of the best levered to megatrends within our coverage universe of parts suppliers,” he wrote. Biopharmaceutical titan Pfizer was another name Goldman highlighted as a compounding buy. Although the majority of analysts covering the stock have it at a hold rating, the potential upside for the stock is nearly 19% from here, per LSEG. Pfizer has slipped 9% this year. Earlier this week, the company said its respiratory syncytial virus vaccine showed promise of protecting adults aged 18 to 59 from getting severely sick. Guggenheim initiated coverage of Pfizer with a buy rating in February, noting that low investor expectations could soar if some of the company’s interesting pipeline assets prove successful in clinical trials. “We believe expectations for Pfizer’s COVID assets have now appropriately come down and, while several of their other largest revenue generators are also facing challenges, we see an opportunity for near-term estimates to increase if management is able to successfully commercialize large potential opportunities,” wrote Guggenheim analyst Vamil Divan. Goldman also likes potato producer Lamb Weston . Analysts have rated the stock either a buy or a strong buy, and see an average 40% upside from here based on consensus price targets, per LSEG. In January, Jefferies deemed the stock one of its top picks for 2024 in the U.S. food sector. “With incremental global processing capacity coming online, margin enhancers intact, carryover pricing present, balance sheet strength, and valuation discounted, we continue to favor LW’s risk reward given fundamentals vis-à-vis valuation,” wrote analyst Rob Dickerson. Lamb Weston stock is down 27% year to date.
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