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All Contents © 2020The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| July 3, 2019
Goldman Sachs’ analysts last month homed in on an investing strategy designed to generate outsize returns for investors. The strategy focuses on stocks that are dominating their respective industries – aka, “superstar stocks.” Interestingly, the number of these giant, dominant companies are on the rise due to a wave of consolidation across multiple industries.
“The market positioning of superstar firms often allows for greater bargaining power over consumers and workers and higher profitability,” the firm’s chief U.S. equity strategist, David Kostin, explained to clients. “Superstar firms have been one driver of the explosion in US corporate margins post-crisis.”
And the numbers speak for themselves. Kostin writes that companies with the highest share of industry sales have returned 49% since 2015. In contrast, companies with the lowest share of industry sales have delivered returns of just 16% during the same period.
Here are five “superstar” stocks to buy, according to Goldman Sachs. We’ll look at the bull theses behind each one, and see what the rest of Wall Street thinks about these stock picks.
Data is as of July 2.
Market value: $40.4 billion
TipRanks consensus price target: $11.68 (15% upside potential)
TipRanks consensus rating: Moderate Buy
Goldman Sachs points out that auto giant Ford (F, $10.12) holds an impressive 40% of the American auto market. Goldman analyst David Tamberrino is excited about the future growth potential for F shares, which already have climbed 32% year-to-date. He has reiterated a “Buy” rating on Ford with a price target of $13, implying that shares could soar another 28%.
The analyst cited the company’s aggressive restructuring as behind his bullish outlook on the stock, writing, “We believe investors will begin to start underwriting improvement in the company’s European region as restructuring actions come to fruition.” Ford is cutting back heavily in Europe, with plans to pare 20% of its workforce there by the end of 2020, as well as shut six of its 24 manufacturing plants. This will allow the company to focus on more lucrative opportunities, including electric vehicles and autonomous driving.
Tamberrino thinks the company can generate a level of European earnings “well above Street expectations for the region over the long-term.”
Bank of America’s John Murphy is also bullish on Ford, upgrading the stock from “Neutral” to “Buy” in May, writing, “Our annual Car Wars analysis indicates that Ford will have one of the freshest line-ups in the US market over the next four years.” He sees the stock hitting $14 within the next 12 months.
See what other top analysts have to say about F on TipRanks.
Market value: $276.6 billion
TipRanks consensus price target: $109.36 (2% downside potential)
With 41% of U.S. industry sales, Procter & Gamble (PG, $111.48) holds the highest share of the household products market, Goldman Sachs says. Indeed, PG is the name behind scores of popular brands that crop up in our daily lives: Bounty paper towels, Charmin bathroom tissue, Crest toothpaste, Gain laundry detergent, Gillette razors, Pampers diapers and Vicks cough and cold products are just a few of the company’s billion-dollar brands.
Goldman Sachs analyst Jason English has upgraded the stock from “Hold” to “Buy” and hiked his price target from $114 to $125 (12% upside potential). And this comes despite a roaring 43% advance in PG shares over the past 52 weeks.
“(Procter & Gamble) has been a clear benefactor of the recent acceleration in end-market growth, and we expect the market to continue to grow in the 3%-plus range in the future,” English writes.
Investors have been deterred in recent years by concerns that PG wasn’t able to “grow volume profitably,” he continues. But the tide is finally changing: “We forecast organic volume and proﬁt dollar growth in 12 of the next 13 quarters.” English sees the potential for double-digit total returns annually, coming from stock appreciation amid high-single-digit earnings growth, as well as the company’s low-single-digit dividend yield. And a reminder: PG is a Dividend Aristocrat that has been growing its payout for 63 consecutive years without interruption.
With this upbeat outlook in mind, the analyst writes: “We believe there is a role in investors’ portfolios for a large liquid global staples company such as this and note that PG remains the most underweight US listed mega-cap global consumer packaged goods company among mutual funds.” Find out how the Street’s average price target for PG breaks down.
Market value: $256.5 billion
TipRanks consensus price target: $154.25 (8% upside potential)
TipRanks consensus rating: Strong Buy
Mickey Mouse creator Walt Disney (DIS, $142.53) remains one of the world’s leading entertainment companies. Disney accounts for 49% of American entertainment sales, according to Goldman’s research.
DIS already is buzzing in 2019, logging a 36% gain on numerous successes (and anticipated successes), including Avengers: Endgame – the second-highest-grossing movie of all time with $2.74 billion in global ticket sales – new Star Wars park attractions and the upcoming launch of its direct-to-consumer streaming service, Disney+, later this year.
“It is the dawn of a new era at Disney,” Goldman analyst Drew Borst told investors recently as he reinstated coverage of the company with a bullish “Buy” rating. “The $70 bn acquisition of Fox is now closed and the approaching debut of Disney+ streaming service in late CY19 marks a momentous shift in the company’s content monetization model from third-party licensing to direct-to-consumer streaming.”
Borst expects near-term headwinds for Disney+ but views it as a “positive long-term strategy. He expects the service will reach 7.5 million global subscribers by 2020 and 73 million by 2025. What are other financial experts saying about Disney’s outlook? Find out on TipRanks.
Market value: $772.4 billion
TipRanks consensus price target: $1,333.89 (21% upside potential)
Alphabet (GOOGL, $1,112.60) is the only FAANG stock to make it onto Goldman’s list of “superstar” stocks to buy. The parent of Google captures 63% of the media & services sales in the U.S., Goldman says. For perspective, Facebook (FB) only laid claim to 24%.
But is this dominance set to last? According to media reports, the Department of Justice is preparing to investigate Google for potentially anti-competitive conduct. The news has clipped the wind from underneath Alphabet’s sales. “Potential implications for Google could include new regulations on business practices, or an antitrust probe leading to a breakup,” Bank of America’s Justin Post says. “It is very rare to break up a company but not unheard of.”
Nonetheless, analysts (including Post) are sure that GOOGL remains a stock worth buying into. Needham’s Laura Martin argues that Alphabet looks “too cheap” right now and reminds investors that the DoJ “only has an antitrust agenda, not privacy goals.” This five-star analyst has a “Buy” rating on the stock and a $1,350 price target (21% upside potential).
What’s more, she calculates that Alphabet shareholders could even see 50% upside in a worst-case breakup scenario. “Investors generally pay more (in aggregate) for pure plays because each investor can decide how much cloud risk vs video risk vs. search engine risk vs Waymo risk, etc. they want, rather than owning all of them,” Martin explained.
Likewise, Jefferies’ Brent Thill believes a breakup is unlikely, but that in any case Alphabet’s “sum-of-the-parts may be worth more than the whole.” He reiterated his GOOGL “Buy” rating on June 13 with a $1,450 price target (34% upside potential). See why other top analysts are also bullish on Alphabet.
Market value: $90.9 billion
TipRanks consensus price target: $55.33 (14% upside potential)
By far the most prominent tobacco company in the U.S. is Marlboro maker Altria Group (MO, $48.60). The company, which owns Philip Morris USA, earns a whopping 88% of American tobacco sales. That makes it Goldman Sachs’ No. 1 “superstar stock.”
However, as most investors appreciate, this is a tough time for the tobacco industry. Regulatory pressures continue to mount, and that has constrained share price growth. Most notably, the FDA is likely to publish a proposed rule on maximum nicotine levels this October.
“Reducing nicotine in cigarettes to non-addictive or minimally addictive levels would be a potential gamechanger for the US industry,” writes Morgan Stanley’s tobacco research team. But even though this would be a negative catalyst, implementation would take years. “The consensus view is that maximum nicotine regulation is unlikely to come into force within the next 10+ years, and that this is far enough away to allow the tobacco manufacturers to delever their balance sheets, protect their dividends and pivot their businesses away from traditional cigarettes.”
Indeed, Altria has already made a strategic investment by snapping up 35% of popular e-cigarette manufacturer Juul. “We are taking significant action to prepare for a future where adult smokers overwhelmingly choose non-combustible products over cigarettes by investing $12.8 billion in Juul, a world leader in switching adult smokers,” Altria CEO Howard Willard said back in late 2018.
More recently, Altria surprised investors by raising cigarette prices 6 cents per pack, including for signature brand Marlboro. Wells Fargo’s Bonnie Lee Herzog sees this as a sign of the company’s significant pricing power, and reiterated her “Outperform” rating (equivalent of “Buy”) on MO with a $65 price target, implying 34% upside potential.
“We increasingly believe MO has multiple levers to pull to offset decelerating cigarette volumes and drive increased profitability including; strong pricing power, cost savings and JUUL service agreement payments,” Herzog writes. Discover how the overall analyst consensus breaks down on TipRanks here.
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 5,000 Wall Street analysts as well as hedge funds and insiders. You can find more of their stock insights here.