25 increasingly efficient stocks with profitability heading into the Q3 earnings season: Goldman Sachs
James Faris
- There's an unusually wide gap between highly efficient companies and everyone else.
- Goldman Sachs shared which firms are growing their returns on equity fastest.
The market's most efficient companies are separating from the pack at a crucial time in the year.
Corporate execution has been excellent once again. Earnings have continued to exceed expectations and are on pace to grow 8% in 2024, according to Goldman Sachs, which also found that returns on equity are hovering close to 21% — one of the highest rates on record.
Wider profit margins and quicker asset turnover have helped solidify returns on equity this year, wrote David Kostin, Goldman's chief US equity strategist, in a late-September note. That's especially impressive, considering that borrowing costs have remained elevated due to lofty interest rates that have only recently started to fall.
However, not all firms are firing on all cylinders heading into the crucial Q3 earnings season and the pivotal 2024 US elections.
The gap between highly efficient companies — as measured by returns on equity — and other stocks in the S&P 500 has widened, Goldman Sachs found. There's a nearly four-percentage-point difference between the index's return on equity and that of the median stock in the index, which Kostin noted is the biggest discrepancy since 1980.
"This gap reflects the fact that profitability has become more concentrated in recent years," Kostin wrote. He pointed out that the spread between stocks with high and low returns on equity has expanded since the financial crisis as companies relied more on leverage and cheap debt.
These discrepancies are also visible across market sectors. Returns on equity have risen most this year for companies in consumer staples, while energy firms have seen a sizable dip in that metric, Kostin remarked. That's further evidence that stock-picking is especially vital right now.
"The wide dispersion in changes in sector profitability mirrors the relatively healthy stock-picking environment this year amid a more micro- rather than macro-driven market," Kostin wrote.
Notably, this trend of widening gaps in returns on equity may be reversing as interest rates fall and labor costs grow at a slower pace while inflation fades. This efficiency metric may also be swayed by corporate tax policy, which may change based on the outcome of the 2024 elections.
25 increasingly efficient stocks to targetIn his weekly note, Kostin shared an updated list of 50 stocks set to enjoy the largest growth in returns on equity. Analysts expect these firms to grow returns on equity by 15%, versus 2% for the typical stock in the S&P 500. As a whole, these companies also trade at a modest discount to the broader index and have outperformed the median stock in 2024 by 4 percentage points.
To help investors find the cream of the crop, Business Insider trimmed the list further by only including stocks that are growing returns on equity faster than the median stock on the list.
Below are the 25 companies that made the cut, along with the ticker, market capitalization, price-to-earnings (P/E) ratio, sector, expected earnings growth for 2024, forward returns on equity, and return on equity growth for each.
1. Southwest Airlines
Ticker: LUV
Market cap: $17.2B
P/E ratio: 479x
Sector: Industrials
2024 earnings growth: -83%
Forward return on equity: 6%
Return on equity growth: 49%
Source: Goldman Sachs
2. Stanley Black & Decker
Ticker: SWK
Market cap: $15.9B
P/E ratio: N/A
Sector: Industrials
2024 earnings growth: 191%
Forward return on equity: 9%
Return on equity growth: 48%
Source: Goldman Sachs
3. Alexandria Real Estate Equities
Ticker: ARE
Market cap: $21.4B
P/E ratio: 146.5x
Sector: Real Estate
2024 earnings growth: 460%
Forward return on equity: 3%
Return on equity growth: 47%
Source: Goldman Sachs
4. International Paper
Ticker: IP
Market cap: $17.3B
P/E ratio: 39.9x
Sector: Materials
2024 earnings growth: -30%
Forward return on equity: 10%
Return on equity growth: 46%
Source: Goldman Sachs
5. Uber Technologies
Ticker: UBER
Market cap: $148.8B
P/E ratio: 80.4x
Sector: Industrials
2024 earnings growth: 25%
Forward return on equity: 23%
Return on equity growth: 45%
Source: Goldman Sachs
6. GE Aerospace
Ticker: GE
Market cap: $200.1B
P/E ratio: 44.6x
Sector: Industrials
2024 earnings growth: 51%
Forward return on equity: 32%
Return on equity growth: 45%
Source: Goldman Sachs
7. Advanced Micro Devices
Ticker: AMD
Market cap: $245.9B
P/E ratio: 197.5x
Sector: Information Technology
2024 earnings growth: 29%
Forward return on equity: 13%
Return on equity growth: 42%
Source: Goldman Sachs
8. Gilead Sciences
Ticker: GILD
Market cap: $103.4B
P/E ratio: 102.4x
Sector: Healthcare
2024 earnings growth: -43%
Forward return on equity: 36%
Return on equity growth: 31%
Source: Goldman Sachs
9. Allstate
Ticker: ALL
Market cap: $50.6B
P/E ratio: 17.2x
Sector: Financials
2024 earnings growth: 1,575%
Forward return on equity: 22%
Return on equity growth: 30%
Source: Goldman Sachs
10. Carnival
Ticker: CCL
Market cap: $22.2B
P/E ratio: 28.4x
Sector: Consumer Discretionary
2024 earnings growth: N/A
Forward return on equity: 20%
Return on equity growth: 29%
Source: Goldman Sachs
11. First Solar
Ticker: FSLR
Market cap: $24B
P/E ratio: 22.3x
Sector: Information Technology
2024 earnings growth: 76%
Forward return on equity: 21%
Return on equity growth: 26%
Source: Goldman Sachs
12. Tyson Foods
Ticker: TSN
Market cap: $22B
P/E ratio: N/A
Sector: Consumer Staples
2024 earnings growth: 160%
Forward return on equity: 7%
Return on equity growth: 25%
Source: Goldman Sachs
13. Targa Resources
Ticker: TRGP
Market cap: $33.2B
P/E ratio: 31.1x
Sector: Energy
2024 earnings growth: 51%
Forward return on equity: 53%
Return on equity growth: 24%
Source: Goldman Sachs
14. T-Mobile
Ticker: TMUS
Market cap: $238.6B
P/E ratio: 25.8x
Sector: Communication Services
2024 earnings growth: 35%
Forward return on equity: 20%
Return on equity growth: 24%
Source: Goldman Sachs
15. Estee Lauder
Ticker: EL
Market cap: $30.4B
P/E ratio: 92.2x
Sector: Consumer Staples
2024 earnings growth: 83%
Forward return on equity: 23%
Return on equity growth: 24%
Source: Goldman Sachs
16. Dominion Energy
Ticker: D
Market cap: $49.6B
P/E ratio: 31.1x
Sector: Utilities
2024 earnings growth: 7%
Forward return on equity: 10%
Return on equity growth: 23%
Source: Goldman Sachs
17. Teradyne
Ticker: TER
Market cap: $21.3B
P/E ratio: 44.1x
Sector: Information Technology
2024 earnings growth: 10%
Forward return on equity: 20%
Return on equity growth: 22%
Source: Goldman Sachs
18. Citigroup
Ticker: C
Market cap: $112.7B
P/E ratio: 17.5x
Sector: Financials
2024 earnings growth: -5%
Forward return on equity: 6%
Return on equity growth: 22%
Source: Goldman Sachs
19. KeyCorp
Ticker: KEY
Market cap: $15.4B
P/E ratio: 21.8x
Sector: Financials
2024 earnings growth: -2%
Forward return on equity: 10%
Return on equity growth: 22%
Source: Goldman Sachs
20. Blackstone
Ticker: BX
Market cap: $186.4B
P/E ratio: 58.4x
Sector: Financials
2024 earnings growth: 17%
Forward return on equity: 53%
Return on equity growth: 19%
Source: Goldman Sachs
21. KKR
Ticker: KKR
Market cap: $110.9B
P/E ratio: 31x
Sector: Financials
2024 earnings growth: 36%
Forward return on equity: 18%
Return on equity growth: 19%
Source: Goldman Sachs
22. Merck
Ticker: MRK
Market cap: $298.6B
P/E ratio: 21.1x
Sector: Healthcare
2024 earnings growth: 438%
Forward return on equity: 40%
Return on equity growth: 18%
Source: Goldman Sachs
23. Analog Devices
Ticker: ADI
Market cap: $111B
P/E ratio: 69.4x
Sector: Information Technology
2024 earnings growth: -32%
Forward return on equity: 11%
Return on equity growth: 17%
Source: Goldman Sachs
24. Corning
Ticker: GLW
Market cap: $36.9B
P/E ratio: 89.6x
Sector: Information Technology
2024 earnings growth: 13%
Forward return on equity: 17%
Return on equity growth: 17%
Source: Goldman Sachs
25. Coterra Energy
Ticker: CTRA
Market cap: $436M
P/E ratio: 32.7x
Sector: Energy
2024 earnings growth: -23%
Forward return on equity: 13%
Return on equity growth: 16%
Source: Goldman Sachs
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