Here Are The Stock Stragglers That Look Poised To Start Sprinting

Here Are The Stock Stragglers That Look Poised To Start Sprinting
Luke Suddards

about 1 year ago4 mins

  • Goldman Sachs has an interesting idea called the "laggards" trade, where the prior year's stock underperformers tend to become leaders in the first quarter of the following year.

  • Three sectors have dramatically underperformed in 2022, and they could be ready to make up some ground.

  • But Goldman’s also done a breakdown of the underperforming stocks that could be poised to see gains, at least for a quarter.

Goldman Sachs has an interesting idea called the "laggards" trade, where the prior year's stock underperformers tend to become leaders in the first quarter of the following year.

Three sectors have dramatically underperformed in 2022, and they could be ready to make up some ground.

But Goldman’s also done a breakdown of the underperforming stocks that could be poised to see gains, at least for a quarter.

Mentioned in story

Maybe some of the stocks that have been sluggish all year have actually been conserving their energy for a sprint in the new year. That’s the idea, anyway, behind what Goldman Sachs calls the “laggards” trade, where a prior year's stock slowpokes tend to become leaders in the first quarter of the following year. It’s a pattern that’s held up in 13 of the past 20 years, even in the market’s down years. Let’s take a look at the sectors and stocks that might be ready to race…

So how does this work?

Looking at last year's laggards as an example, the stocks that had a rough 2021 caught up during the first quarter of 2022. They underperformed the S&P 500 by 29% over the whole of 2021, but gained on the S&P 500 by 5.6% in the first quarter of 2022, which happened to be the laggards’ third-best outperformance since 2002.

Return table of laggards and the S&P 500 from 2002. Negative figures are in parentheses. Sources: FactSet and Goldman Sachs.
Return table of laggards and the S&P 500 from 2002. Negative figures are in parentheses. Sources: FactSet and Goldman Sachs.

As you can see, the previous year’s laggards tend to outpace the performance of the S&P 500 in the first quarter of the following year by an average of 1.4%. But don’t get too excited about those laggards’ prospects. While one year’s stragglers might do well in the first quarter of the following year, across the rest of the year, they usually slump back to their underperforming ways. Just look at the average performance from 2002-21: the S&P 500 gained an average of 11%, while the laggards underperformed that by 27%. The takeaway: the laggard trade is a short-term strategy – you don’t want to be holding this for the full year.

So, which sectors have been lagging this year?

Tech, healthcare, and consumer discretionary have had a rocky 2022. In fact, these three sectors account for 66% of the laggards, compared to just 48% in 2021. Goldman’s laggard trade suggests that means they’re likely to make up some ground in the first quarter of 2023. To take advantage, you could look at the iShares S&P 500 Information Technology Sector UCITS ETF (ticker: IUIT; expense ratio: 0.15%), iShares S&P 500 Consumer Discretionary Sector UCITS ETF (IUCD; 0.15%), or the iShares S&P 500 Health Care Sector UCITS ETF (IUHC; 0.15%).

Sector weights as a percentage of all laggard sectors. Sources: FactSet and Goldman Sachs.
Sector weights as a percentage of all laggard sectors. Sources: FactSet and Goldman Sachs.

And which stocks have been lagging then?

1. The especially underappreciated laggards

Goldman’s analysts have a “buy” rating on at least 16 stocks that have a “neutral” or “sell” rating from the consensus of voices in the market. They say these companies are underappreciated and could generate at least 10% in returns for investors who are willing to make a contrarian bet.

Goldman Sachs has a “buy” rating and sees at least a 10% gain for these stocks, but it’s in the minority: most other analysts have given them a “neutral” or “sell” rating. Sources: FactSet and Goldman Sachs.
Goldman Sachs has a “buy” rating and sees at least a 10% gain for these stocks, but it’s in the minority: most other analysts have given them a “neutral” or “sell” rating. Sources: FactSet and Goldman Sachs.

2. The laggards with too-low earnings estimates

Earnings are the lifeblood of stocks. And Goldman says better-than-expected earnings and upward revisions could help some laggard stocks outpace Wall Street price targets (“upside to target” column). The below chart shows the stocks where Goldman is forecasting earnings per share (EPS) or earnings before interest, tax, depreciation, and amortization (EBITDA) to be above consensus for the fourth quarter of 2022 and for all of 2023.

Buy-rated laggards with at least 10% upside where Goldman estimates are at least 2% above consensus for the fourth quarter of 2022, and all of next year. Sources: FactSet and Goldman Sachs.
Buy-rated laggards with at least 10% upside where Goldman estimates are at least 2% above consensus for the fourth quarter of 2022, and all of next year. Sources: FactSet and Goldman Sachs.

3. Laggards with solid revenue growth at cheap prices

With fears about slowing global economic growth, some companies are inevitably going to struggle next year. It’s a good thing then that Goldman has identified a group of laggards that are expected to offer at least 10% revenue growth in 2023 and that currently have a cheap valuation (as measured by enterprise value divided by an EBITDA multiple of 12x or lower).

Buy-rated laggards with at least 10% upside, plus estimated 2023 sales growth of 10%+, EV/EBITDA of 12x or lower. Sources: FactSet and Goldman Sachs.
Buy-rated laggards with at least 10% upside, plus estimated 2023 sales growth of 10%+, EV/EBITDA of 12x or lower. Sources: FactSet and Goldman Sachs.

4. Laggards with strong cash flows

Companies with a record of strong free cash flows (FCF) are a reliable choice during times of uncertainty. That’s because you know the company’s been through many market cycles and it’s still delivering returns for shareholders. Goldman compiled a list of stocks that currently have a 5% or higher FCF margin (FCF, as a percentage of sales) and that are expected to widen that margin by at least one percentage point in 2023 and 2024. The analysts also added a valuation metric in the form of FCF yield, requiring that it be at least 5% in 2023. FCF yield is the free cash flow per share divided by the share price.

Buy-rated laggards with at least 10% upside, FCF margins of at least 5% and that are forecast to expand by at least one percentage point in 2023 and 2024, and FCF yields (FCF per share divided by the share price) of at least 5%. Sources: FactSet and Goldman Sachs.
Buy-rated laggards with at least 10% upside, FCF margins of at least 5% and that are forecast to expand by at least one percentage point in 2023 and 2024, and FCF yields (FCF per share divided by the share price) of at least 5%. Sources: FactSet and Goldman Sachs.

What’s the opportunity then?

When it comes to the market’s laggards, the good news is that Goldman’s done your homework for you – and it sees the trend holding through the first quarter of next year. Not bad, considering it’s one of the world’s top investment banks. To take advantage of its research here, you could consider investing in the sectors mentioned above via an EFT, or you could look to invest in single stocks that Goldman has highlighted, depending on which grouping you think is most likely to outperform. Alternatively, you could choose to take the top three stocks with the highest upside percentage to Wall Street’s price target (using the second column from the right) in each of the four stock categories. You could also look at which stocks appear in multiple categories, such as Lyft (LYFT) or RingCentral (RNG). It’s your portfolio and you make the rules.

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