Cyclical Laggards Offer Attractive Risk/Reward: Goldman Sachs

Cyclical Laggards Offer Attractive Risk/Reward: Goldman Sachs

Goldman Sachs Portfolio Equity Research published another US Weekly Kickstart letter to investors on Friday, October 24th. This week’s GS Kickstart focuses on a list of 20 cyclical laggard stocks that attractive risk/reward profiles including The Goodyear Tire & Rubber Company (NASDAQ:GT) and Oracle Corporation (NYSE:ORCL).

GS analysts David J, Kostin and colleagues note that last week was a huge bounce back week for U.S. stock markets, with the S&P 500 surging by almost 5% after a couple of weeks with substantial losses. They also note, “However, share prices of some global cyclical stocks have declined disproportionately relative to earnings revisions.”

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Cyclical Laggards

Last week’s S&P 500 performance

Of note, the S&P 500 was up a very strong 4.7% last week, bouncing back after an 8% swoon over the prior weeks. Health Care was the best-performing sector at +6.8%, while Utilities was the worst-performing sector at +0.9%. Goldman Sachs projects the S&P 500 will move up to around 2150 in 12 months, a 10.2% gain.

Cyclical Laggards

Lower oil prices good for most businesses

Crude oil prices have plunged 25% over the last couple of months. While this will certainly hurt revenues for oil producers and related firms, it is reducing overhead costs for most U.S. businesses, which should lead to higher profits.

Cyclical Laggards

The Goldman Sachs analysts point out that: “Analysts and investors seem to be focusing exclusively on the negative effects of lower oil prices while neglecting the beneficiaries.” Kostin et al. note that after Energy, Consumer Discretionary has the largest negative EPS revisions. Most of the downward revision is due to the projected effect of slower global growth on the auto industry.

Cyclical Laggards

Many Media, Retailing and Durables & Apparel stocks, however, have also seen estimates slashed, despite the fact that the drop in crude prices should be a net positive for overall US economic growth, and especially help the consumer. That said, Utilities is the only sector that has not seen negative revisions to 2015 earnings over the last couple of weeks (see Exhibit 2).

Goldman Sachs list of 20 cyclical laggards with good risk/reward

The Goldman Sachs analysts screened their proprietary Global Cyclical Laggards basket to come up with 20 stocks with positive 2015 EPS growth who are undervalued relative to sector peers.

The Goodyear Tire & Rubber Company (NASDAQ:GT) — Tires & Rubber — Buy

Johnson Controls Inc (NYSE:JCI) — Auto Parts & Equipment — Neutral

Baker Hughes Incorporated (NYSE:BHI) — Oil & Gas Equipment & Services Buy

Cameron International Corporation (NYSE:CAM) — Oil & Gas Equipment & Services — Neutral

National-Oilwell Varco, Inc. (NYSE:NOV) — Oil & Gas Equipment & Services — Neutral

Fluor Corporation (NYSE:FLR) — Construction & Engineering — Neutral

Boeing Co (NYSE:BA) — Aerospace & Defense Neutral

General Electric Company (NYSE:GE) — Industrial Conglomerates — Neutral

International Business Machines Corp. (NYSE:IBM) — IT Consulting & Other Services — Neutral

TE Connectivity Ltd (NYSE:TEL) — Electronic Manufacturing Services — Buy

Corning Incorporated (NYSE:GLW) — Electronic Components — Neutral

Oracle Corporation (NYSE:ORCL) — ORCL Systems Software — Buy

NetApp Inc. (NASDAQ:NTAP) — Tech Hardware Storage & Peripherals — Neutral

Seagate Technology PLC (NASDAQ:STX) — Tech Hardware Storage & Peripherals — Neutral

Symantec Corporation (NASDAQ:SYMC) — Systems Software — Neutral

Freeport-McMoRan Inc (NYSE:FCX) — Diversified Metals & Mining — Neutral

Owens-Illinois Inc (NYSE:OI) — Metal & Glass Containers — Neutral

Eastman Chemical Company (NYSE:EMN) — Diversified Chemicals — Neutral

Avery Dennison Corp (NYSE:AVY) — Paper Packaging — NC

FMC Corp (NYSE:FMC) — Diversified Chemicals — Not Rated

Cyclical Laggards

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