Stock picks to buy, cheap companies for value rebound: Goldman – Business Insider

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  • Investors rushed into cheaper “value” stocks after an update on Pfizer’s experimental COVID-19 vaccine, and David Kostin of Goldman Sachs says it’s the start of a long-awaited shift in the market. 
  • Kostin says that company earnings have also been significantly better than expected, which will help stocks rise in 2021 and 2022.
  • With that in mind, he names a group of stocks that should do well as the economy recovers — even though Wall Street is assuming they’ll earn less than half as much in 2021 as they did in 2019.
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“Wait ’til next year” has been the refrain of two disappointed groups of people: Baseball fans whose teams didn’t win it all, and value investors who thought a turnaround was coming.

Buying cheaper stocks hasn’t worked for years, as higher-growth and higher-priced stocks have consistently been the market’s biggest winners. So anyone who says “this time is different” might be viewed skeptically — but with that in mind, there’s also reason to think things are changing as a COVID-19 vaccine gets closer.

After Monday’s enormous shift into neglected stocks like energy and financials, Goldman Sachs Chief US Equity Strategist David Kostin says those less-costly and less-successful stocks should be a core component of investors’ strategy in 2021

“We expect the emergency use authorization (EUA) and distribution of an effective vaccine during the next several months will lead to significant upward earnings revisions for virus-exposed firms and help give investors confidence to rotate into those low-valuation stocks,” he wrote in a note to clients.

Kostin and Goldman have raised their forecasts for stocks and corporate earnings recently based on both the rebounding economy and the evidence that earnings are holding up better than most experts thought they would.

Based on earnings, the recovery, and record-low interest rates, Kostin says the S&P 500 should rally to 4,300 by the of 2021 and 4,600 at the end of 2022. And in that environment, less-expensive stocks are a more appealing opportunity.

“The valuation gap between high and low valuation stocks has been a good forward indicator of the degree of Value stock outperformance,” he said. “The sharp Value underperformance in 2020 has expanded that gap to a degree only matched during the peak of the Tech Bubble in 2000.”

That said, Kostin isn’t telling investors to give up on growth altogether, as low rates and sluggish economic growth will provide a baseline of support to those stocks. He also says the increasing interest in socially-responsible investing means companies with high scores on environmental, societal, and governance metrics will also fare well.

But with value stocks on the outs for so long, Kostin’s take on those stocks might be the most unexpected of those three calls. Since he believes better-than-expected earnings will keep stocks rising in the next few years, he’s using them to identify some of the best value picks.

The following 20 stocks are arranged from lowest to highest based on how their estimated 2021 profits compare to the earnings the companies reported in 2019 earnings. For all of these companies, the Wall Street consensus is that they will earn less than half as much next year as they did pre-COVID.

Kostin suggests that’s not likely, as these companies will benefit from a post-vaccine recovery that is priced in for some of their peers.

“The median company in the S&P 500 is anticipated to generate 2021 EPS that is 7% above its level of last year,” he said.

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