With the S&P 500 now 17 percent off its low, investors should turn to picking individual stocks to capture the best stock market returns, according to Goldman Sachs stock strategists.
Stock-picking opportunities are most plentiful among stocks in the consumer discretionary, communications serivces and health care sectors. They highlight stocks like Monster Beverage, WellCare Health Plans, Incyte, Twitter and NVIDIA.
The stock market’s move higher since the December low has been a ‘macro’ trade, where the whole market rose, defensives lagged and cyclicals led the way. As a result, stocks have become extremely correlated to each other and the market. Now at the 94th percentile, the correlation is the fourth largest on record, and Goldman recommends a list of stocks that have a high “dispersion” or are bucking the trend.
“We forecast a stable macro environment in the near-term, characterized by steady US economic activity and a patient Fed, which we believe has been priced in the market,” the Goldman strategists wrote. They expected a limited move to 2,750 by midyear, but the strategists expect a move to 3,000 on the S&P 500 by year end.
So near term, gains should be capped, and the strategists expect the market to be flat for the next three to six months.That means stock pickers could fair better than those that buy the whole market or even sector ETFs.
“We have seen nascent signs of this rotation to ‘alpha’ with ETF outflows that have exceeded mutual fund outflows. Consistent with the ongoing transition from active to passive, ETFs saw inflows throughout much of 2018, while mutual funds experienced substantial outflows,” they wrote. But during the month of January, as stocks gained 8 percent, investors dumped ETFs, and outflows swelled to $32 billion, compared with just $8 billion leaving mutual funds.
Goldman strategists constructed a list of stocks that have those high ‘dispersion scores,’ meaning stocks that are driven more by micro factors than are associated with big macro moves.
“Stocks with high dispersion scores are more likely to have heightened responses to idiosyncratic news and present the best alpha generation opportunities,” the Goldman strategists wrote. “Importantly, high dispersion scores do not necessarily suggest outsized positive returns alone, but rather returns that deviate most from market returns in either direction.”