Goldman Says You Should Buy These Four Stocks Now

Goldman Says You Should Buy These Four Stocks Now
Paul Allison, CFA

5 months ago5 mins

  • Goldman Sachs analysts frequently publish their best ideas on a conviction list, which is then distilled by the investment bank’s top guns and curated each month into a director’s cut. This month, four new firms made the cut.

  • Three of the stocks hail from companies you might not have thought about before: biotech firm Quanterix, work uniform mainstay Cintas, and identity cloud company Okta.

  • The fourth stock is one on everyone’s mind this year: Nvidia. And Goldman’s really got it bad for this stock.

Goldman Sachs analysts frequently publish their best ideas on a conviction list, which is then distilled by the investment bank’s top guns and curated each month into a director’s cut. This month, four new firms made the cut.

Three of the stocks hail from companies you might not have thought about before: biotech firm Quanterix, work uniform mainstay Cintas, and identity cloud company Okta.

The fourth stock is one on everyone’s mind this year: Nvidia. And Goldman’s really got it bad for this stock.

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Every month, Goldman Sachs spins up a director’s cut of its analysts’ top ideas. This elite list represents the top buy recommendations from across the investment bank, but with an eye toward the assets that might appeal to a broad set of investors. This month, four new names popped onto the list. So let’s give them a look and see why Goldman is pounding the table about them right now.

Idea #1: Quanterix (QTRX)

Goldman sees upside potential in this stock – to the tune of about 25%. The Massachusetts-based biotech firm’s involved in diagnosing neurological conditions like Alzheimer’s, and its leading blood-based testing approach is opening the potential for a much earlier diagnosis – something that has been a serious challenge with this disease. Goldman points out that this is important right now because certain drugs have been shown to slow Alzheimer’s significantly if started early enough.

Now, Quanterix’s stock won’t be for everyone. With just a $1 billion market value, the company is small and relatively unknown. It’s also been in a rapid growth phase, which means that while sales have been snowballing, so have costs. And, because of that, it hasn’t turned a profit. But the firm has plenty of cash to fund its growth and the Alzheimer’s opportunity could be truly massive. With no profit to speak of, Goldman uses a market-value-to-sales multiple to value the shares, and notes that recent acquisitions of similar firms have closed at around eight times their enterprise value (EV) to sales. If that were to happen here, it could give Quanterix a $43 stock price, compared to its current price of around $27 today. Even on a far lower, five-times multiple, there’d be upside to around $29.

Idea #2: Nvidia (NVDA)

Few will fall off their chair when they see Nvidia making the list. Goldman’s view isn’t really any different to anyone else’s here – anyone that’s positive, that is. If anything, Goldman’s just pointing out that it’s even more of a believer than everyone else, as far as I can tell.

The crux of Goldman’s argument is that demand for Nvidia’s AI-powering graphics processing units (GPUs) will continue to be insatiable for the foreseeable future, and with Nvidia poised to make even more units as it unblocks supply constraints, sales will continue to rip higher. In fact, Goldman estimates that Nvidia’s data center segment (where those GPU sales are recorded) will grow by more than 50% on average over the next couple of years to around $70 billion. For context, the firm's entire revenues, including sales into the gaming and auto industries, was just $27 billion last year.

Nvidia’s data center revenue forecasts. Source: Goldman Sachs.
Nvidia’s data center revenue forecasts. Source: Goldman Sachs.

In short, then, Goldman reckons Nvidia shares could reach $605 – that’s 32 times its 2024 earnings estimate. Mind you, those sorts of multiples are a bit of a guess. So I’d recommend you take a look at my quick discounted cash flow (DCF) calculator. Right now I’m figuring that the market’s pricing in 10% growth in free cash flow for the next ten years and 2.5% after that. It’s up to you whether you think that’s a reasonable assumption or not.

Idea #3: Cintas (CTAS)

Cintas’s business is pretty simple. It’s a leading supplier of corporate apparel – or work uniforms – to industries across the US. Cintas has an army of trucks and distribution centers across the country so it’s able to pick up, launder, and drop off regulatory standard clean uniforms every day in a way that’s cost-effective for companies and workers. If you’ve ever worn scrubs, lab white coats, chef’s attire, or coveralls, there’s a good chance that Cintas was involved in delivering those daisy-fresh threads. And since they’re making the rounds to so many workplaces anyway, they offer building cleaning services too.

Cintas is a steady business with some best-in-class services, and it’s been seeing faster revenue expansion post-Covid. Goldman says that growth looks to be here to stay, thanks to two big drivers. First, Cintas does a lot of work in the healthcare industry, and ever since the pandemic, hospitals and medical facilities have been demanding even cleaner clothes and buildings. Second, this demand isn’t likely to remain contained to the healthcare sector. Some 60% of companies – and their workers – currently take care of all this cleaning and laundering themselves. But in today’s world, with a need for greater environmental care, that’s rarely going to cut it, and outsourcing is both better for the planet and the bottom line. All that adds up to a revenue growth run rate of around 7% to 8% for Cintas, a pace that Goldman says is likely to be sustainable. What’s more, when revenue growth gets pacey for service firms like Cintas, costs often rise more slowly (after all, delivery drivers can do more dropoffs on the same day’s pay). And that means Cintas’s margins should fatten up nicely.

Idea #4: Okta (OKTA)

If you work for a youngish, tech-first company, there’s a chance that you’ve come across Okta. The firm provides identity solutions that allow employees to log in to any enterprise app on any device. It’s like a one-stop shop for all your workplace apps.

The industry is still enjoying healthy growth, and although big rivals like Microsoft are hot on this company’s heels, Okta’s products are still superior and its stock looks like an opportunity. Goldman notes that after a few go-go years that saw Okta’s stock climb tenfold, the startup got carried away with the ambitious acquisition of competitor Auth0. It shelled out $6.5 billion for Auth0 and proceeded to make a dog’s breakfast of the integration. In any case, that’s been a massive distraction for Okta and the firm's stock price has almost round-tripped, recently changing hands for around $80.

But the whole painful episode is nearly behind the firm, Goldman says, and now it can look forward to getting back to the kind of growth it was enjoying only a few years ago. Goldman sees Okta trading as high as $100 a year from now, which would put it at around 28 times Goldman’s free cash flow forecast. That’s not cheap, but it’s also not ridiculous for a rapid-growth stock.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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