“We advocate three strategies for fund managers,” Goldman Sachs’ David Kostin writes in a note targeted to institutional clients. “Own (a) companies with low operating leverage (as opposed to high); (b) firms with low labor costs as a share of revenues (as opposed to high); and (c) stocks with a combination of dividend yield and growth.”
Kostin justifies each of those strategies, respectively: (a) “Stocks with low operating leverage outperform as the economy decelerates”; (b) “Wage inflation has accelerated above 3%, and for many firms is outpacing the increase in prices charged. Downward pressure on record-high profit margins from labor inflation may prompt negative EPS revisions that are often associated with falling share prices.”; and (c) “Short-term and long-term US interest rates are forecast to remain low for a considerable period of time. Stocks with a combination of dividend yield and growth should outperform.”
Goldman Sachs offers clients baskets of stocks for each strategy. Kostin, however, identified 20 stocks that overlap two or more of those strategies.
Low operating leverage, low labor costs, and dividend growth:
- Texas Instruments (TXN)
- Gilead Sciences (GILD)
Low operating leverage and low labor costs:
- Biogen Inc. (BIIB)
- LyondellBasell Industries (LYB)
- Amphenol Corp. (APH)
- VeriSign Inc. (VRSN)
- Expeditors IntlI (EXPD)
- IPG Photonics Corp. (IPGP)
- PulteGroup Inc. (PHM)
Low operating leverage and dividend growth:
- AbbVie Inc. (ABBV)
- Amgen Inc. (AMGN)
- Starbucks Corp. (SBUX)
- Lam Research Corp. (LRCX)
- KLA-Tencor Corp. (KLAC)
- Omnicom Group Inc. (OMC)
Low labor costs, and dividend growth:
- AT&T Inc. (T)
- AES Corp. (AES)
- Western Union (WU)
- Foot Locker Inc. (FL)
- Hanesbrands Inc. (HBI)
Kostin notes that the fund management industry has been hit with a combination of underperformance and client outflows.
“But fund managers want to outperform!” he explained.
Maybe these picks will help.