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All Contents © 2019The Kiplinger Washington Editors
By Harriet Lefton
| January 30, 2018
Goldman Sachs has released a bullish report highlighting its latest top stocks to buy for 2018.
Here I focus on seven of these ‘Conviction Buy’ stocks.
What’s worth nothing is Goldman’s intriguing sector analysis. While you might expect tech stocks to rank highest, this list focuses firmly on financials and industrial stocks. A couple of defense stocks and big insurance names also make the cut.
Indeed, Goldman says it expects the S&P 500 to rise to 2850 by year end, with the financials and industrial sectors set to outperform the rest of the market. In particular financial stocks should see significant benefit from tax reform, deregulation, capital return and rising interest rates.
As a result, Goldman recommends investors equal-weight tech stocks and overweight these sectors instead. Tech stocks are at risk of unfavorable regulation and won’t benefit as much from tax cuts, so Goldman does not consider them top stocks to buy.
Here I am also including the overall outlook on these stocks from the Street’s top analysts.
I used TipRanks to check the best-performing analyst consensus on each of the stocks covered. This is a useful way to get a 360° take on a stock before making any critical investing decisions!
So, without further ado, let’s dive in and take a closer look at these 7 top stocks to buy for 2018:
Prices and data are from the original InvestorPlace story published on Jan. 26. Click on ticker-symbol links in each slide for current prices and more.
Goldman Sachs is very bullish on one of Warren Buffet’s favorite stocks: Bank of America (BAC). In fact, the firm calls BAC one of its top large cap picks from the financial sector. And so far, this seems to be the right call.
The bank has just announced fourth-quarter results with impressive EPS of $0.20 (after tax).
Five-star Oppenheimer analyst Chris Kotowski describes this as an ‘excellent finish to an excellent year’. He had been anticipating EPS of just $0.13. Now Kotowski expects BAC to hit $37 (20% upside potential). He says: “Our core belief about bank stocks is that what makes them outperform is a rising ROE [return on equity], rather than just a high one, and BAC is providing us an object lesson in that regard.”
According to GS, Bank of America looks set to make serious gains from rising interest rates in 2018. This is due to 1) its large book of floating rate loans and 2) its strong deposit franchise. Plus, with excess capital of 9%, Goldman expects the bank to significantly increase its share repurchases and dividend payouts.
As we can see below BAC has the Street’s overall seal of approval. The stock has a ‘Strong Buy’ top analyst consensus with 9 recent buy ratings vs just 2 hold ratings. These analysts are projecting (on average) 8% upside potential from the current share price.
The second large-cap bank singled out by Goldman is Wells Fargo & Company (WFC). Wells Fargo is set to get a massive tax break thanks to President Trump. In the fourth quarter alone, this tax cut amounted to over $3 billion! The saving is the result of a reduction in the company’s expected expenses for future taxes.
As for Goldman, the firm is clear that WFC should be putting regulatory issues behind it and moving firmly forward. GS also sees share repurchases and rising dividend payouts ahead. Indeed, Goldman analyst Richard Ramsden recently upgraded WFC from Buy to Conviction Buy. He says the market is underestimating the fact that WFC is the biggest beneficiary of Blue Sky earnings. At the same time, he sees the stock’s valuation as attractive while the dividend yield offers downside support.
Below, however, we can see that the Street has a more cautiously optimistic take on WFC. Top analysts have published 9 buy ratings on WFC in the last three months, alongside 6 hold ratings. Meanwhile the top analyst price target of $67 comes out 4% above the current share price. Oppenheimer’s Kotowski cautions ‘that the next quarter or two will likely still be somewhat lackluster.’ He notes that progress on expenses will only come in 2019 as 2018 is firmly a ‘reinvestment’ year.
Goldman sees upside of close to 14% for this massive U.S. life insurance company. The bank sees multiple reasons to be bullish on MetLife (MET) in 2018.
Goldman analyst Alex Scott called the stock his best idea among insurers. Already MetLife is celebrating a legal victory against US regulators who wanted MetLife to be treated as a ‘too big to fail’ company. This would have meant much stricter regulation — but the Trump administration dropped the case on January 19.
And as far as Goldman is concerned, MET is on the way to add between 100 and 150 basis points to its return on equity (ROE) by 2020. The firm sees profitability rising on the back of investments in cost saving technology and a less volatile business mix. Plus, Goldman says that as a life insurance company MET looks set to hit the jackpot when the 10-year US treasure note yield rises.
But it seems the rest of the Street still has to be convinced. This ‘Moderate Buy’ stock currently has a 50/50 buy-to-hold ratio from top analysts. These top analysts are projecting average upside of 6% from the current share price. Deutsche Bank, for example, says upside will only really come when the company can deliver consistent earnings growth.
Goldman Sachs has been a big fan of defense stock Northrop Grumman Corporation (NOC) for a long time. Back in October, GS highlighted Northrop Grumman as the best positioned defense company with strong operating results and a raised outlook. And going into 2018, this stock is still one of the firm’s top two defense stocks. The firm says defense stock growth will exceed market expectations in 2018.
Indeed, Goldman is predicting big upside potential for NOC of around 15%. “Defense stocks should outperform again in 2018 as growth continues to exceed expectations,” says Goldman. And as a result, the firm comes out more bullish than consensus in its Northrop 2018 projections. Over the next decade, Goldman forecasts 10% average annual revenue growth for the stock.
In total NOC has a firmly ‘Moderate’ Buy rating with only 4 buy ratings from top analysts and 3 hold ratings. However, the Street does show the stock as having fair upside potential of 8.4% from the current share price. Note that Wells Fargo has also just upgraded NOC. WFC’s Sam Perlstein says defense stocks like NOC with the fastest organic growth are set to perform best in 2018. His $360 price target translates into 15% upside potential.
The second defense stock in Goldman’s top 2018 list is L3 Technologies (LLL). Goldman believes its looking deeply undervalued compared to peers on the basis of P/E, EV/EBITDA, and free cash flow yield. These discounts should shrink in 2018, say Goldman, and this will push the stock to new highs. Already, the company is trading at new 52-week highs.
Top Cowen & Co analyst Cai von Rumohr is also backing LLL for 2018. He reiterated his buy rating on the stock on 22 January with a $225 price target (7% upside). LLL is transitioning to a growth stock states von Rumohr. He sees “extensive margin & growth initiatives” bolstering potential for 10%+ 2018-20 EPS expansion. Meanwhile, the stock is also well positioned for accretive M&A activity.
Overall we can see that LLL has a relatively positive Moderate Buy analyst consensus rating. This breaks down into 5 Buy ratings and 2 Hold ratings in the last three months. With a current share price of almost $210, top analysts see 5% upside ahead.
“Machinery stocks present a particularly compelling opportunity in 2018 as the industry continues to emerge from a cycle trough,” Goldman declares.
And the leading stock in this space is first-class Industrial Goods stock Deere & Company (DE). Indeed, Deere said on its last earnings call that “the industry is experiencing stronger replacement demand for large equipment.”
Goldman is now anticipating significant upside for Deere in 2018 of roughly 25%. Bear in mind DE already experienced a whopping 60% climb last year. Deere has a strong operating leverage combined with expanding profit margins says Goldman. On top of this, Deere also has the advantage of savvy high R&D investment and capital spending. All of this could be yours for an ‘attractive normalized valuation’ concludes Goldman Sachs.
Encouragingly, on DE the firm is also aligned with the rest of the Street. This is a ‘Strong Buy’ stock with 8 buy ratings and just 2 hold ratings from top analysts in the last three months.
Analysts like the company’s acquisition of Wirtgen Group last month. With Wirtgen Group, the firm gains exposure to the global road construction and transport infrastructure markets. However, the Street is more constrained with its projected upside potential of 8%.
I am ending this list with Intercontinental Exchange (ICE) — a financial stock which boasts 100% Street support. As its name suggests, ICE owns exchanges for financial and commodity markets. In fact, it operates no less than 23 regulated exchanges including ICE futures in the US, Europe and Canada.
Shares in the NYSE owner have exploded over the last year from $57 to the current share price of $76. Now, Goldman predicts that shares will rise by a further 10% over the year. This is in line with the Street top analyst average price target of close to $83 (see below).
The company has just announced an exciting new partnership with Blockstream, Inc. ICE will now tap Blockstream tech to bring bitcoin and cryptocurrency price data to hedge fund investors. The crypto feed will be based on real-time info from more than 15 exchanges.
“With the broad array of cryptocurrencies and exchanges, and given the price variances between exchanges, it’s critical that investors have a comprehensive source of pricing information,” says COO Lynn Marti.
TipRanks offers investors the latest insight into eight different sectors by tracking the activity of 4,500 analysts, 5,000 financial bloggers and even 37,000 corporate insiders. This article is from Harriet Lefton of InvestorPlace. As of this writing, Lefton did not personally hold a position in any of the aforementioned securities.
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