- Stock prices are sinking, and it remains to be seen if earnings estimates will drop as well.
- Goldman Sachs Chief US Equity Strategist David Kostin expects a rally in stocks later in 2022.
- Kostin says these 16 stocks will be bargains even if analysts slash their forecasts dramatically.
Two of the most fundamental questions in valuing stocks are: how much money are companies going to earn, and how much are investors willing to pay for those earnings?
Over the last couple of weeks, stocks have plunged because investors collectively decided that they were no longer willing to pay as much money per each dollar of earnings — or in Wall Street terms, the “multiple” it costs to buy a dollar of S&P 500 earnings dropped sharply. But forecasts for how much money US companies are going to make haven’t changed much.
That means the next question is if those earnings forecasts will go down next. Goldman Sachs Chief US Equity Strategist David Kostin thinks experts will lower their expectations — but even if that happens, Kostin recently wrote that gradual growth in reported earnings for corporate America will boost the S&P 500 to 4,300 by the end of this year.
That’s a 17% rally from Thursday’s closing levels. But Kostin warns that stocks aren’t cheap even after all of the recent sell-offs, and if multiples stay where they are while earnings estimates slip, based on Goldman’s projections things could look a lot worse in 2023.
“If by year-end consensus 2023 EPS estimates move halfway towards our top-down forecast of $239 and the P/E multiple remains constant at 17x, the implied index level would be 4165,” Kostin wrote in a report dated June 10. “In a, if the EPS estimate moves halfway to $200, a 14x P/E would bring the S&P 500 to 3150.”
That would represent another 14% skid after the latest round of selling. But even if overall profit forecasts fall, Kostin says there are individual companies that are trading at steep discounts right now.
Those companies are listed below, and all 16 stocks have market caps of at least $10 billion and strong balance sheets. Somewhat remarkably, Kostin says they would be trading at low valuations even if analysts collectively cut their profit estimates by 20% from their levels at the time of Kostin’s writing.
The median stock on the list trades at 12 times its estimated earnings in 2023 even if consensus estimates are cut by 20%. The median S&P 500 stock trades at 20 times earnings under those conditions.
The stocks are ranked from lowest to highest based on those modified 2023 price to earnings ratios.
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