- Goldman Sachs is forecasting that an improving economic environment in 2021 should support stocks of companies that are investing the most for future growth.
- The bank maintains a basket of 50 high-growth investment ratio stocks that have outperformed the S&P 500 index by nine percentage points year-to-date.
- It recently rebalanced the basket and introduced 10 new stocks to the mix as of October 22.
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While some investors are hyper-focused on how the markets could react around election day, others already have their eyes set on the opportunities in 2021.
To that end, Goldman Sachs analysts led by Ryan Hammond are predicting that investors will reward companies investing for growth as the economy improves in 2021.
“Our economists’ expectation of a sharp acceleration in economic activity in 2021 is above consensus (+5.8% vs. +3.9%). Our rates strategists expect the 10-year UST yield to rise (to 1.5% by year-end 2021) and our FX strategists expect the USD to weaken (-5% in the next 12 months),” Hammond wrote in a research note on Monday.
In reflationary environments where global governments and central banks stimulate the economy through monetary policies and tax reductions, companies investing the most for future growth via capital expenditure, research and development, as well as mergers and acquisitions have typically outperformed, according to the note.
“We recommend investors own our High Growth Investment Ratio basket (GSTHHGIR) heading into 2021, which considers how much firms invest in excess of depreciation relative to their operating cash flow,” he said.
The basket, which consists of 50 stocks, has outperformed the S&P 500 by nine percentage points this year, returning 17%. Goldman calculates the growth investment ratio as how much firms invest relative to their operating cash flow.
More specifically, the typical stock in the basket has a 76% growth investment ratio versus the 9% ratio for the typical S&P 500 stock. It also offers faster 2021 sales growth (+10% vs. +7% for the S&P) but trades at “only a modest valuation premium” of 22 times earnings versus the S&P’s 20 times earnings.
“Importantly, these companies have not overinvested at diminishing rates of return. The median basket stock is expected to generate a cash return on cash invested (CROCI) of 18% in 2021 (vs. 12% for S&P 500),” he said.
Goldman Sachs recently rebalanced the basket of stocks and introduced 10 new stocks to the mix. Below are the new constituents in increasing order of 3-year growth investment ratio.
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