GOLDMAN SACHS: Buy these 21 cheap, unappreciated stocks that offer above-average growth potential

This story is available exclusively on Business Insider Prime.
Join BI Prime and start reading now.

  • Ben Snider, a strategist at Goldman Sachs, compiled a list of undervalued stocks that are generating above-average returns on capital.
  • Though these stocks are trading cheaply, Snider says that most of them have stronger balance sheets and are forecast to grow earnings per share at a quicker pace than the median stock in the S&P 500.
  • All the stocks Snider selected trade in the fourth percentage quintile of the S&P 500 sector in which they reside.
  • Click here for more BI Prime stories.

There’s no denying that the coronavirus-induced stock swoon has created opportunities in the market for those willing to grit their teeth and buy in the middle of a calamity. But with the S&P 500 trading about 26% higher than its nadir carved out on March 23, many investors may be wondering if they’ve missed the boat.  

Luckily, Goldman Sachs has identified a swath of attractive stocks that the market left behind — and it compiled a list of 21 cheap issues that are producing above-average returns on capital.

“These stocks each screen in the fourth quintile of their S&P 500 sector on a combination of valuation metrics, meaning they trade at multiples below their typical sector peer but do not rank among the firms with the most depressed valuations, which tend to face more serious fundamental headwinds,” Ben Snider, a strategist at the firm, said.

He added: “Stocks in that group have generally traded 15% below the sector median, but today trade with a P/E discount of 25%.”

Snider provided a chart that shows S&P 500 sector valuations compared with their 30-year historical distribution. According to him, there’s a clear opportunity in the fourth quintile.

Goldman Sachs Global Investment Research



Goldman Sachs Global Investment Research


“Although these firms carry discounted multiples, most have stronger balance sheets, generate superior returns, and have faster consensus 2019-2021 EPS growth than the median S&P 500 stock,” Snider said.

The way Snider sees it, these stocks are a win-win. The identified issues are generating high returns on capital, and they aren’t trading at a multiple that would indicate a major foundational issue with the business. 

What’s more, all of Snider’s picks rank in the top half of their sectors under a proprietary measure that combines return on equity, assets, and invested capital, he said.

Listed below are 21 stocks Snider and his Goldman colleagues view as strong portfolio additions. They’re listed by descending valuation percentile for their sector, meaning there’s greater upside as the list progresses.

21. Travelers Cos.

TRV



TRV


Ticker: TRV

Sector: Financials

Valuation percentile in sector: 40

Source: Goldman Sachs Global Research

20. D.R. Horton Inc.

DHI



DHI


Ticker: DHI

Sector: Consumer discretionary

Valuation percentile in sector: 39

Source: Goldman Sachs Global Research

19. Skyworks Solutions

SWKS



SWKS


Ticker: SWKS

Sector: Information technology

Valuation percentile in sector: 38

Source: Goldman Sachs Global Research

18. Simon Property Group

SPG



SPG


Ticker: SPG

Sector: Real estate

Valuation percentile in sector: 38

Source: Goldman Sachs Global Research

17. CDW Corp.

CDW



CDW


Ticker: CDW

Sector: Information technology

Valuation percentile in sector: 37

Source: Goldman Sachs Global Research

16. H&R Block Inc.

HRB



HRB


Ticker: HRB

Sector: Consumer discretionary

Valuation percentile in sector: 35

Source: Goldman Sachs Global Research

15. UnitedHealth Group

UNH



UNH


Ticker: UNH

Sector: Healthcare

Valuation percentile in sector: 35

Source: Goldman Sachs Global Research

14. A. O. Smith Corp.

AOS



AOS


Ticker: AOS

Sector: Industrials

Valuation percentile in sector: 35

Source: Goldman Sachs Global Research

13. Lam Research Corp.

LRCX



LRCX


Ticker: LRCX

Sector: Information technology

Valuation percentile in sector: 35

Source: Goldman Sachs Global Research

12. Oracle Corp.

ORCL



ORCL


Ticker: ORCL

Sector: Information technology

Valuation percentile in sector: 34

Source: Goldman Sachs Global Research

11. Federal Realty Investment Trust

FRT



FRT


Ticker: FRT

Sector: Real estate

Valuation percentile in sector: 34

Source: Goldman Sachs Global Research

10. Gilead Sciences

GILD



GILD


Ticker: GILD

Sector: Healthcare

Valuation percentile in sector: 33

Source: Goldman Sachs Global Research

9. Best Buy Inc.

BBY



BBY


Ticker: BBY

Sector: Consumer discretionary

Valuation percentile in sector: 32

Source: Goldman Sachs Global Research

8. Philip Morris International

PM



PM


Ticker: PM

Sector: Consumer staples

Valuation percentile in sector: 30

Source: Goldman Sachs Global Research

7. Henry Schein Inc.

HSIC



HSIC


Ticker: HSIC

Sector: Healthcare

Valuation percentile in sector: 27

Source: Goldman Sachs Global Research

6. Motorola Solutions

MSI



MSI


Ticker: MSI

Sector: Information technology

Valuation percentile in sector: 27

Source: Goldman Sachs Global Research

5. Humana Inc.

HUM



HUM


Ticker: HUM

Sector: Healthcare

Valuation percentile in sector: 25

Source: Goldman Sachs Global Research

4. General Dynamics

GD



GD


Ticker: GD

Sector: Industrials

Valuation percentile in sector: 24

Source: Goldman Sachs Global Research

3. Applied Materials

AMAT



AMAT


Ticker: AMAT

Sector: Information technology

Valuation percentile in sector: 23

Source: Goldman Sachs Global Research

2. Aflac Inc.

AFL



AFL


Ticker: AFL

Sector: Financials

Valuation percentile in sector: 21

Source: Goldman Sachs Global Research

1. Boston Properties

BXP



BXP


Ticker: BXP

Sector: Real estate

Valuation percentile in sector: 21

Source: Goldman Sachs Global Research

Get the latest Goldman Sachs stock price here.

More:

Features
Investing
BI Prime
Goldman Sachs

Chevron iconIt indicates an expandable section or menu, or sometimes previous / next navigation options.

Read More