First-quarter earnings season was pretty stellar, but investors were unmoved, shrugging off huge earnings per share (EPS) growth and higher sales.
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So where should retail investors put their money? According to investment bank Goldman Sachs, the answer is to buy stocks with the highest potential for sales growth, even if these stocks sell for a premium.
Goldman has rebalanced its “high revenue growth basket” of stocks, noting that of the stocks in the portfolio, the median sales growth forecast is for 12% growth compared to the 5% for the typical S&P 500 company. But, while these stocks are expected to experience higher growth, their valuations are higher.
Higher valuations can scare off some investors, for fear that they are paying more for a stock that might not outperform the market. But, according to Goldman, right now, higher growth stocks are coming with higher valuations. The bank expects that these higher-valued stocks will outperform the S&P 500 during the next 12 months.
Goldman noted that nine firms have forecast sales growth above 20%, and they are Align Technology, Amazon, Autodesk, Cabot Oil & Gas, Concho Resources, Facebook, Netflix , Pentair, and Vertex Pharmaceuticals.
|COG||CABOT OIL & GAS CORP||17.60||+0.57||+3.35%|
|CXO||CONCHO RESOURCES INC.||49.24||+1.68||+3.53%|
|VRTX||VERTEX PHARMACEUTICALS INC.||294.45||-0.95||-0.32%|
Recapping first-quarter earnings
Earnings and revenue increased in the first quarter with tax reform contributing significantly to the improved results. The average S&P 500 EPS grew by 23% -- the fastest pace since the second quarter of 2011, and 5% more than the initial EPS forecast. Sales rose higher than forecast and pretax earnings were much better than expected.
The best performing sector was the energy sector, which had EPS growth of 92% thanks to soaring crude oil prices. The next best performer was information technology, with EPS growth of 31%, financials with 26% and industrials with 25%.
Despite elevated expectations at the start of earnings season, the percentage of companies whose first-quarter results were better than expected was the highest percentage since the second quarter of 2010, according to Goldman. Still, investors did not reward the above-consensus results while firms missing on earnings were also punished more severely than usual.