The Top Stock Picks For A Calmer 2022, According To Goldman Sachs

The Top Stock Picks For A Calmer 2022, According To Goldman Sachs
Andrew Rummer

about 2 years ago3 mins

  • While 2021 turned out to be a great year for stock market investors, strategists and analysts are divided over what will happen next year.

  • To measure investing success, the pros look at metrics like the Sharpe ratio to gauge a portfolio’s risk-adjusted returns.

  • Goldman’s High Sharpe Ratio basket of stocks has beaten the market over the medium term and could be worth a look for 2022.

While 2021 turned out to be a great year for stock market investors, strategists and analysts are divided over what will happen next year.

To measure investing success, the pros look at metrics like the Sharpe ratio to gauge a portfolio’s risk-adjusted returns.

Goldman’s High Sharpe Ratio basket of stocks has beaten the market over the medium term and could be worth a look for 2022.

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2021 proved an exceptionally easy year to be an investor – at least in hindsight. Now, looking forward to 2022, Wall Street is divided. But Goldman Sachs has picked out a few stocks that it thinks will give you the best risk-adjusted returns.

What do you mean 2021 was easy?

On a risk-adjusted basis, looking not just at the absolute return but also how many terror-inducing price swings an investment suffered, simply sticking cash in an S&P 500 tracker fund beat almost every other strategy last year. Yes, even bitcoin. 

Through December 16th, the S&P 500’s “Sharpe ratio” – a widely used measure of risk-adjusted returns that divides an investment’s absolute returns by its volatility – stood at 2.0. That puts 2021 in the top 20% of all years over the past three and a half decades for risk-adjusted stock market returns. It also trounces the -0.6 Sharpe ratio for 10-year US government bonds and the 0.8 ratio for bitcoin, whose healthy 64% absolute return was undermined by massive volatility.

Absolute and risk-adjusted returns in 2021 (source: Goldman Sachs)
Absolute and risk-adjusted returns in 2021 (source: Goldman Sachs)

What does 2022 have in store?

Strategists at Wall Street banks, who look over markets with a bird’s eye view, are unusually divided over what next year will bring for US stocks. The most optimistic of 19 strategists polled by Bloomberg thinks the S&P 500 will gain 15% over the coming 12 months, while the most pessimistic reckons we’re due for a 5% decline. 

Analysts, who look bottom-up at individual stocks, can’t agree either – especially when it comes to the unprofitable companies that have done so unusually well since the pandemic struck. Goldman points out that analysts have a particularly wide spread of price estimates for shares in meme-stock retailer GameStop, cancer drug developer Novocure, and artificial intelligence software provider C3.ai

So what does Goldman recommend?

The bank has screened the US market to find companies that score highly on two criteria: stocks that analysts think will rise a lot in 2022 and those that exhibit reasonable volatility, as implied by how much investors are willing to pay for options. 

The resulting High Sharpe Ratio basket contains “stocks with the highest prospective risk-adjusted returns,” according to Goldman. The median stock in the basket is trading 32% below analysts’ estimates – versus 12% for the S&P 500 as a whole – and yet has a similar implied volatility (32% versus 29% for the S&P 500). Goldman reckons its basket has the potential to produce a 2022 risk-adjusted return of 1.0, compared to its forecast of just 0.4 for the S&P 500. 

The sectors likely to show the strongest risk-adjusted gains are communication services, energy, and consumer discretionaries. And the single stocks that top the list are payment processor Global Payments (ticker: GPN), video game maker Activision Blizzard (ticker: ATVI), and phone carrier T-Mobile US (ticker: TMUS). Check out the entire list here: 

Goldman’s High Sharpe Ratio stock picks
Goldman’s High Sharpe Ratio stock picks (bold indicates a new addition)

How have these risk-adjusted picks fared in the past?

Over the longer term, Goldman’s stock picks from this fairly simple process have beaten the S&P 500, although the technique didn’t work that well in 2021. $100 invested in the High Sharpe Ratio basket at the end of 2004 would be worth $447 now, compared to $381 for the same sum invested in the S&P 500.

Sharpe ratio picks versus the S&P 500

Overall, Goldman’s analysis highlights two things. First, it’s always worth considering the volatility of your investments as well as the potential for gains. And second, you can produce a compelling list of stocks with just a couple of simple criteria – in this case, the stock’s discount to analyst estimates and its recent implied volatility.

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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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