Goldman Sachs Analyzes Laggard Trade and Provides Top Picks for Q1 2024
Goldman Sachs suggests that today's market-leading stocks may need to remain vigilant as there is a possibility that this year's laggard stocks could rise to lead the first-quarter performance of the next year. In a report by analyst Deep Mehta on Monday, he highlighted the tendency for calendar-year laggards to outperform in subsequent first quarters over the past 21 years. Mehta noted that 53% of laggard stocks have generally outperformed in the first quarter of the following year. Since Goldman Sachs began tracking the "Laggards" trade in 2022, this trend has held up in 13 out of 21 years. On average, laggards have outperformed the S&P 500 by 130 basis points, with a basis point equaling one one-hundredth of a percent.
Strong Historical Trend and Recent Performance
The trend of laggards outperforming was particularly strong in the first quarters of 2021 and 2022. However, in 2023, laggards underperformed the S&P 500 by an average of 1%, although Mehta pointed out that they would have outperformed by 4.7% if not for the regional banking crisis in March. This year's cohort of laggards has faced significant challenges, with a year-to-date decline of 37%, nearing levels seen only in 2007 and 2020.
Shift in Sector Composition and Five Categories of Laggards
Mehta highlighted the changing sector composition of laggards compared to the previous year. Healthcare, Financial, and Industrials are prominent sectors among this year's laggards, while the mix of tech, communication services, and consumer discretionary stocks has decreased. Goldman Sachs analysts identified five broad categories of stock laggards.
The first category, "differentiated buys," includes opportunities where Goldman Sachs analysts have out-of-consensus buy ratings. Stocks such as Best Buy, Extra Space Storage, and Mosaic fall into this category. The "out of consensus" group comprises buy-rated stocks like CF Industries, Clear Secure, and Chesapeake Energy, which analysts see as having "beat-and-raise" potential. On the other hand, there are sell-rated stocks like Hormel Foods and Foot Locker, where analysts perceive downside risk to consensus estimates.
Identifying Growth Opportunities and Strong Performers
Goldman Sachs analysts also identified laggards with at least 10% expected sales growth in the "growth at a reasonable price" group. Companies like Shoals Technologies Group, Biomarin Pharmaceutical, and Bumble fall into this category. Additionally, Norfolk Southern, Bath & Body Works, and Mohawk Industries were identified as having "rebounding margins" after experiencing pressure in 2023 but are expected to bounce back next year. Finally, stocks with a track record of CROCI (cash return on capital invested) generation were highlighted, including Bristol-Myers Squibb, Honeywell International, and United Parcel Service.
In conclusion, Goldman Sachs' analysis suggests that laggard stocks may have the potential to outperform in the first quarter of 2024. The historical trend and recent performance indicate the possibility of a comeback for laggards. Investors may find opportunities in differentiated buys, out-of-consensus stocks, growth at a reasonable price, rebounding margins, and companies with a track record of cash return on capital invested.
Hot Take: The Impact of Laggard Stocks on New Business Formation
Goldman Sachs' recent analysis of laggard stocks and their potential to lead the first-quarter performance of the upcoming year could have significant implications for new business formation. The report by analyst Deep Mehta suggests that 53% of laggard stocks generally outperform in the first quarter of the following year, a trend that has held up in 13 out of the past 21 years.
The Laggard Effect and New Businesses
The potential comeback of laggard stocks could create a dynamic and competitive market environment, which new businesses must navigate. The shift in sector composition of laggards, with Healthcare, Financial, and Industrials featuring prominently, could influence the sectors that new businesses choose to enter.
Opportunities and Challenges for New Businesses
The identification of five broad categories of laggard stocks, including "differentiated buys" and stocks with "beat-and-raise" potential, could present both opportunities and challenges for new businesses. On one hand, these categories could provide new businesses with investment opportunities. On the other hand, the presence of sell-rated stocks and those with downside risk to consensus estimates could pose risks.
Growth Opportunities and Strong Performers
The identification of laggards with expected sales growth and those with a track record of cash return on capital invested could provide new businesses with insights into potential growth opportunities and strong performers in the market. However, new businesses must also be prepared for the potential rebound of stocks that experienced pressure in the past year.
In essence, the potential outperformance of laggard stocks in the first quarter of 2024, as suggested by Goldman Sachs' analysis, could significantly impact new business formation, presenting both opportunities and challenges.