Many investors have been shaken by the major sell-off in stocks in recent weeks even as the market stages a rally. But Goldman Sachs Group Inc. is telling investors in its latest weekly report that the stock slump represents a major buying opportunity. The firm is advising investors to focus on companies with low labor costs, cyclicals, small caps, and value plays.
Stocks With Upside
To exploit this opportunity, Goldman identifies 25 buy-rated stocks that recently fell by more than their historic correlations with the broader market. The implication is that these stocks are likely to recover at a faster pace than the market. Those buy-rated stocks lagged the most versus their beta-implied returns, from the market peak on January 26 through the recent trough on February 8. Beta is a measure of a stock’s historical correlation with moves in the broader market. Among the 25 listed by Goldman are these twelve: McDonald’s Corp. (MCD), Chevron Corp. (CVX), Dollar Tree Inc. (DLTR), Google parent Alphabet Inc. (GOOGL), Lam Research Corp. (LRCX), Applied Materials Inc. (AMAT), Wells Fargo & Co. (WFC), MetLife Inc. (MET), United Parcel Service Inc. (UPS), Noble Energy Inc. (NBL), Parker-Hannifin Corp. (PH), and Principal Financial Group Inc. (PFG).
Goldman is making its recommendations after the S&P 500 Index (SPX) has declined by 7.6% from its record close on January 26 through noon New York time on February 12. Through February 8, the index was down by 10.2%, which officially represented a correction. The recent market drop and a spike in volatility caused the Investopedia Anxiety Index (IAI) to register a high level of worry among 27 million readers worldwide. Extremely high concerns about the securities markets are outweighing low concerns about other economic and financial matters.
Lessons of History
Since 1976, there have been eleven corrections of 10% or more that did not occur during a recession, Goldman says in its most recent U.S. Weekly Kickstart report. Only in 1987 did one of these eleven corrections eventually turn into a bear market plunge of 20% or more. In fact, Goldman adds, longer history indicates that bear markets are unlikely to occur without a recession. Given that global GDP growth remains strong, and the likelihood of a recession is low, Goldman is confident that stocks will bounce back.
For those eleven recent non-recessionary corrections, Goldman says, the typical profile was a 15% decline across 70 trading days, followed by full recovery to the previous high after 88 additional trading days. Investors who bought the S&P 500 once it had declined by 10% in those eleven corrections would have experienced positive returns in the following three-, six-, and twelve-month periods 75% of the time, Goldman adds, with respective median returns of 6%, 12%, and 18% over these periods.
Also, the recent drop in stock prices may have been intensified by a blackout period for discretionary share repurchases that exists for several weeks before earnings are released. Goldman notes that corporations are the largest single source of demand for their own shares, and that these blackout periods typically are marked by lower returns and higher volatility. Now that about two-thirds of firms are outside their blackout windows, Goldman expects this downward pressure to dissipate.
Historical Post-Correction Leaders
In the three months following those eleven non-recessionary post-1976 corrections, materials and industrial stocks have been the best-performing sectors, with the median outperformance for each being 270 basis points (bps) versus the entire S&P 500, Goldman calculates. United Parcel Service and Parker-Hannifin are in the industrial sector.
Low valuation stocks have produced positive returns 63% of time after those eleven recent corrections, with a median excess return of 350 basis points, per Goldman. The median forward P/E ratio is 17 for the S&P 500, Goldman computes, while MetLIfe, Lam Research, and Principal Financial are at 10, and Wells Fargo is at 12. Regarding small cap stocks, the Russell 2000 Index has outperformed the S&P 500 by a median 240 basis points, Goldman adds.
Goldman believes that rising inflation and interest rates should be beneficial for financials such as Wells Fargo, MetLife and investment management firm Principal Financial Group.
The strong economy and tight labor market are fueling wage growth, and a recurring theme of Goldman’s has been to look for companies with low labor costs. MetLife also fits into this this theme, as well as Alphabet and Lam Research. Lam is a leading producer of equipment for manufacturing semiconductors, rated a “powerhouse” by Scott Black of Delphi Management. (For more, see also: 5 Gurus’ Stock Picks for a Pricey Equities Market.)