Investors concerned about holding shares of companies with slowing profit growth might look at Goldman Sachs' basket of stocks with earnings growth forecasts of 20% or higher in 2019. The firm’s list includes companies across industries such as Wellcare Health Plans (WCG), Incyte Corp. (INCY), Chipotle Mexican Grill Inc. (CMG), Advanced Micro Devices Inc. (AMD), Under Armour Inc. (UAA) and Netflix Inc. (NFLX).
Goldman notes that 43 S&P 500 companies are expected to post 2019 EPS growth greater than 20% while 19 firms are expected to see earnings fall by more than 20%. "The wide distribution of earnings growth highlights the importance of fundamental stock-picking as a way of differentiating returns," the firm says. To address this issue, Goldman recommends that investors focus on micro-driven stocks, rather than ones driven by broader macro trends. "We recommend investors focus on relative value and idiosyncratic alpha opportunities," the firm said in its latest US Weekly Kickstart report.
(2019 EPS Forecast)
· Wellcare; 22%
· Incyte; 89%
· Chipotle; 38%
· Advanced Micro Devices; 37%
· Under Armour; 28%
· Netflix; 50%
Source: Goldman Sachs
While 2019 consensus EPS estimates have fallen from 10% growth in September to just 4% currently, Goldman notes that many investors are overlooking the bigger picture. Analysts expect median EPS growth of 7% in 2019, which is much stronger. Meanwhile, revenue is forecast to grow 5%.
The weakest earnings players in the S&P 500 drag down the aggregate, resulting in more modest returns for the broader group, so Goldman recommends stocks with the highest idiosyncratic risk. This implies major upside opportunity, as well as downside risk, measured through its dispersion score framework.
Wellcare is one company with strong top and bottom line analyst estimates for 2019, at 29% and 22% respectively. It has a high dispersion score at 11.9%, the fourth highest in the group. The $14 billion company, which offers managed care health plans primarily through Medicaid, Medicare Advantage and Medicare Prescription Drug plans, has seen its stock gain 18% this year, far outperforming the S&P 500. Positive drivers include a longer-living population and growing demand for healthcare.
Also on Goldman's list is pharmaceutical company Incyte, which owns the FDA-approved drug called Jakafi. It's stock is up about 30% this year. Incyte is expected to post sales growth of 8% and EPS growth of 89% this year. Incyte’s dispersion score is 8.7.
It’s important to note that even stocks with fast earnings growth also have their limits. They, too, may get dragged down sharply if the economy plunges into a recession, or if stocks move down sharply in a sustained bear market.