- Goldman Sachs’ top US stock strategist says investors should focus on very profitable growth stocks.
- David Kostin says less-profitable companies will be vulnerable to rising interest rates.
- He published a list of companies expected to have high growth and strong margins through 2023.
When it comes to the stock market, history is an imperfect guide for the future.
Goldman Sachs Chief US Equity Strategist David Kostin wrote in a recent note to clients that when the S&P 500 rises more than 20% in 12 months, during the following 12 months the market performs a bit better than the index’s long-term average of 10%.
But as of late Friday, the benchmark index was up 26% this year, and Kostin said that returns next year will be slightly lower than that long-term average. He’s forecasting an annual gain of 9%, or 10% including dividends, based on his projection that the S&P 500 hits 4,700 at the end of this year and 5,100 in 2022.
But that’s hardly a bleak outcome.
“Decelerating economic growth, a tightening Fed, and rising real yields suggest investors should expect modestly below-average returns next year,” he said. “The equitywill continue.”
Kostin tells investors that they should tilt their portfolios toward cyclical and economic re-opening stocks, including those that have recently struggled because of high input costs, as a way of betting on stronger economic growth and improvement in supply chain troubles. He also suggests focusing on companies with lower labor costs, and on profitable growth stocks.
He explains that companies with rapid growth that are losing money, or that have shaky profit margins, are more vulnerable to sudden shocks and to higher interest rates that will dent the growth that investors are counting on — and it’s very likely that interest rates will rise in 2022.
Kostin says that stocks with shorter duration are a more sensible bet in this environment.
“Many high quality firms have strong long-term growth profiles that consequently make those share prices particularly sensitive to changes in interest rates,” he said. “The valuations of profitable growth stocks should be less vulnerable to rising rates than those of their low-margin peers.”
The stocks listed below fit that profile especially well. They’re all projected to have strong annual sales growth through 2023, as well as high profit margins. While Kostin expects the medianstock on the Russell 3000 index to have a profit margin of about 12% in 2023, these companies are expected to be at least twice that profitable.
The following growth stocks are ranked from lowest to highest based on consensus projections for their profit margins in 2023 as of November 15.