Reuters
- Goldman Sachs Chief US Equity Strategist David Kostin names a group of stocks that could make much larger gains than the broader market but don't offer an outsized risk of volatility.
- Kostin is forecasting a gain of about 5% for the S&P 500 in 2020 and says these stocks could triple that return based on their consensus price targets.
- Like many other experts, Kostin says stocks may trade in a narrow range for much of next year as investors wait for the presidential election.
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Like most on Wall Street, Goldman Sachs is telling investors that 2020 won't bring the kinds of dramatic stock returns they enjoyed this past year.
But chief US equity strategist David Kostin says there are not only ways to beat the market, but ways to do it without piling on much additional risk. For that task he's using a measurement based on the Sharpe ratio, which is used to evaluate risk-adjusted returns on investment.
The result is a group of stocks that have strong potential returns based on their price targets, but according to Kostin have less implied volatility based on options market data.
He adds that this value-oriented strategy tends to do best when the market is making big gains or taking large losses. So he thinks these stocks are likely to do best later in 2020, as the market could spend most of the year in a holding pattern.
"We expect the index will remain range-bound until the presidential election in early November," he writes in a note to clients.
While Kostin thinks the S&P 500 index will rise only about 5% in the next year, to a target of 3,400 at the end of 2020, he's gathered a group of 50 stocks with a forecast median return of 17%. The largest returns are concentrated at the top, where multiples have gotten compressed and returns have been weaker than the broader market this year.
"The High Sharpe Ratio basket may outperform on both an absolute and risk-adjusted basis during the second-half of 2020," he writes.
While he thinks those stocks are positioned for better-than-average returns, Kostin says they're not much riskier than the broader market. That, too, is based on implied volatility in the options market over the next six months.
The stocks below are ranked in ascending order based on their expected return divided by their implied volatility. The higher the ratio, the greater the potential risk-adjusted return.
Get the latest Goldman Sachs stock price here.