Investors looking at today's market wondering where to put their money may want to consider the latest list from Goldman Sachs.
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A market trapped in a narrow trading range makes picking stocks wisely more important than ever.
Goldman Sachs compiled the 22 best investing ideas from its US analysts, regardless of sector.
These stocks all have strong fundamentals, high upside, and a "Buy" rating from Goldman Sachs.
Passive index investing may have gained popularity over the past few years, but with stocks stuck in a tight trading range recently, it has suddenly become a stock picker's market. Investors seeking strong returns can't afford to wait around for a market rocked by a banking crisis, debt ceiling showdowns, and Federal Reserve announcements to regain its footing.
Instead, Goldman Sachs says investors should be searching for alpha — and they have some ideas about where to find it.
In a note to clients published June 1, Director of Americas Equity Research Steven Kron debuted a list of the best of the best investment ideas sourced from Goldman Sachs analysts and selected by members of the firm's Investment Review Committee.
"This new "Conviction List – Directors' Cut" is designed to provide investors with a curated and active list of 20-25 of what we believe to be our most differentiated fundamental Buy ideas across our US stock coverage," wrote Kron.
Macro factors to watch
A number of macroeconomic factors were at the top of Goldman Sachs analysts' minds as they were making their recommendations.
For instance, while Wall Street consensus is that there's a 65% chance of a recession in the US within the next 12 months, Goldman Sachs economists believe that it's closer to a 35% probability.
A key factor in whether the economy worsens will be labor. "Specifically, they are watching whether job openings can keep falling without a commensurate large increase in the unemployment rate," Kron wrote of his firm's economists.
They must have mixed feelings about last week's job report: while the US added a better-than-expected 339,000 nonfarm jobs last month, the unemployment rate ticked up to 3.7%.
Another trend to watch is bank lending. While the recent banking crisis is in the rearview mirror for now, one of the effects of several sudden regional bank failures could be a credit crunch.
"Indeed, our banks analysts expect loan growth to continue to slow through 2023 and into 2024 given the tightening of underwriting standards and fewer available cheap funding sources," Kron wrote.
Finally, Goldman Sachs is keeping a close eye on US consumers — particularly lower-income consumers — who may cut costs more dramatically in the face of an economic downturn than their higher-spending counterparts. But solid earnings from consumer discretionary companies and a strong retail sales report in April lead Goldman Sachs to believe that consumers are doing better than expected at the moment.
"To be sure, there were some signs of a softening consumer, but at this point this softening doesn't appear to be worse than what the markets were already anticipating and it does not appear to be enough (yet) to thrust the economy into recession," Kron wrote. "In fact our economists continue to see consumer spending as a "source of strength" through 2023."
Top investment ideas to buy now
Note, however, that while Goldman Sachs analysts did incorporate those trends into their theses for the stocks below, they are not the primary reasons why the analysts believe these companies are strong investments. Instead, analysts employed a bottoms-up, fundamentals-first approach to find these investment ideas.
"Said differently, while the 'P' will always be important, we are more focused on where our analysts see a different 'E' than is currently being contemplated by the market — earnings drive stocks over time," Kron wrote.
The stocks below are Goldman Sachs' analysts' 22 most differentiated stock picks, taken from a wide range of sectors and investing styles. But the one thing they have in common is that they each offer strong risk-adjusted returns — in fact, the average upside to these stocks' price targets is 39%.
All 22 investment recommendations are below, along with each stock's ticker, price as of May 31, price target, percent upside to that target, upside to next year's expected earnings versus consensus estimates, and what percentage of Wall Street recommends the stock as a buy. In addition, there's a brief summary of each stock's investment thesis.
