Waiting for a stock market bounce? Goldman Sachs is on the prowl for stocks with the highest potential to rebound. In other words, companies that have been hit hardest by the coronavirus outbreak.
Robinhood’s most popular investments list shows retail investors have also gone stock-picking during this year’s equities downturn. Its similarity with Goldman’s analysis shows that mom-and-pop might have better instincts than their reputation suggests.
Goldman’s high-risk, high-return stock list includes an oil exploration company, airlines, and even a cruise stock. The coronavirus pandemic hit companies in these industries especially hard, and shares in some of these companies might have nowhere to go but up. But Goldman warns that’s by no means certain. These are high-risk, high-reward equities.
In a note, Goldman V.P. of U.S. equity strategy, Ryan Hammond said:
Following a decade of persistently narrow return dispersion, the dispersion of S&P 500 returns has risen to its widest level since 2009 as elevated volatility has more than offset record-high correlations.
So Goldman assembled a list of S&P 500 stocks with the highest dispersion scores . To clarify, that means shares that swing the most because of factors unique to the company.
They represent possible opportunities for high returns if these companies bounce back from the market’s worst fears. Here’s the list.
While advising clients about these high dispersion equities with potential upside to beat market benchmarks, Hammond said:
We believe these stocks represent fertile ground for investors to overlay our dispersion scores with views on near-term catalysts or the outlook for companies, in order to maximize alpha generation.
Travel and cruise stocks are on the list because of the severe impact of coronavirus to these companies. MGM Resorts (NYSE: MGM) cratered 78% from a pre-coronavirus high of $33.66 per share to $7.14 mid-March. Since then, it’s retraced 30% of the losses to around $15.00 in Monday trading.
Cruise stocks like Royal Caribbean (NYSE: RCL) are down calamitously as their ships remain docked indefinitely. They are weathering the coronavirus pandemic with virtually no revenue. Carnival Cruise Line (NYSE: CCL) says it’s spending a billion dollars a month with its 100 ships docked.
Meanwhile, Norwegian Cruise Line Holdings Ltd (NYSE: NCLH) has been the single worst performer in the S&P 500 in 2020.
While coronavirus has ravaged airlines, United Airlines (NYSE: UAL) – which appears on Goldman’s list – is poised for a quarter one earnings beat .
Oil stocks like Apache Corporation (NYSE: APA) are up against the ropes this year too, making them potential value buys. APA crashed 86% from a February high of $28.90 to $4.02 on April 1. It has since retraced 25% of the disastrous losses to the $10 per share level in Monday trading.
The approach Goldman Sachs recommends in its recent note is what made Warren Buffett one of the wealthiest people in America. Buffett calls it “value investing,” finding stocks that are a great value because they are trading for (sometimes far) less than they’re worth.
Goldman’s high dispersion list is not a list of stock picks or recommendations. It’s a list of candidates for potentially marketing-beating returns. To determine the level of risk and the worthiness of an investment, Warren Buffett would say, (while holding up a stack of 10-Ks) :
read 500 pages like this every day. That’s how knowledge builds up, like compound interest.
Buffett has long advised stock pickers to go beyond headline-scanning and watching the share price move up and down on the charts. The “Oracle of Omaha” and investors like him view reading financial statements like going treasure hunting.