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Investors are always on the lookout for untapped opportunities, especially in stocks that have been heavily discounted and now present promising opportunities for those prepared to wager on a recovery.
As the new year looms, a seasoned strategy, known as the “Laggards” trade, is witnessing a revival.
In its recent analysis, Goldman Sachs has shone a light on stocks that have trailed the broader market significantly on a year-to-date basis. Despite their underperformance, these Buy-rated securities hold considerable potential for robust gains in the upcoming year.
Laggards can often represent contrarian investment opportunities, as they may not have garnered bullish sentiment from investors yet, or the prevailing analyst consensus might be so low that even minor positive changes in fundamentals could result in significant performance gains.
The Laggard Phenomenon: The year 2023 has been a turbulent one for many stocks, with some sectors witnessing declines reminiscent of the tumultuous years of 2007 and 2020. However, history suggests a silver lining – the laggards of one year often emerge as leaders in the first quarter of the next.
Goldman Sachs’ equity strategists, Deep Mehta and Tarun Lalwani, CFA, explained that despite a 37% YTD underperformance relative to the S&P 500 index, 2023’s laggards could be next year’s leaders, as “the market rally in November suggests signs of an early reversal.”
Sector Shift: This year’s laggards differ from those of 2022, with Healthcare, Financials, and Industrials taking the lead. These stocks align with several key investment themes: low financial returns, lower quality scores, affordable valuations, and high growth prospects.
1) Laggards with Differentiated Bullish Views: These are Buy-rated stocks by Goldman Sachs’ analysts, who hold a contrarian opinion compared to less than half of Wall Street analysts. They have at least a 10% upside potential. Some of the stocks included in this group are as follows:
2) Laggards with Consensus-Defying Estimates: These stocks have Goldman Sachs’ estimates that significantly diverge from the consensus, suggesting a potential surprise factor. Highlighted below are some key stocks within this group:
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3) Growth at Reasonable Valuations: These are Buy-rated laggards projected to have double-digit topline growth in 2024 and 2025, with a Price-Earnings-Growth ratio below 1.0. Included in this group are the following notable stocks:
4) Laggards with Rebounding Margins: These stocks are expected to show positive sales growth and improving operating margins in 2024 compared to 2023. The following represents a selection of stocks categorized in this group:
5) Laggards with Superior CROCI: These are stocks with a consistent Cash Return on Capital Invested (CROCI) greater than the Weighted Average Cost of Capital (WACC), indicating efficient capital use and profitability. Key stocks within this group are listed below:
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