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One of the most important questions for investors in 2021 is how to bet on the ongoing economy recovery — even if its course looks uncertain right now. Goldman Sachs is giving its answer.
Chief US Equity Strategist David Kostin says he expects success for companies with high operating leverage, or the companies that will experience proportionately greater growth in their profits as their revenues increase. That means they should benefit the most as economic activity increases.
"Our high Operating Leverage basket has outperformed the S&P 500 by 9 pp (+18% vs. +9%) since November 9th when Pfizer-BioNTech released the surprisingly efficacious phase 3 vaccine results," he wrote in a note to clients. "Stocks with high operating leverage will likely continue to outperform as corporate revenues recover."
Kostin writes that overall, S&P 500 operating leverage is the highest it's been in a decade. That's one reason he expects a stronger recovery in earnings than most Wall Street experts do.
"Even absent any cost controls, an economic and revenue recovery – benefitting from increased fiscal stimulus and widespread vaccinations – should lead to an even stronger earnings rebound," he said. "Our 2021 S&P 500 EPS forecast of $178 stands well-above consensus of $167."
Kostin and his team assessed S&P 500 stocks based on their operating leverage, as measured by their comparatively low costs of goods sold; depreciation expenses; and selling, general and administrative expenses. Those low expenses mean larger profits for them as revenues ramp up.
Kostin's high-leverage group exclude financial and utility companies because of their different financial metrics and business models. He says the median degree of operating leverage for S&P 500 companies is 2.7, while the median degree for the top 50 companies listed by Kostin is 5.9.
The companies listed below all meet or exceed the median the group Kostin writes about. They're ranked from lowest to highest based on their degree of operating leverage.
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Ticker: IR
Sector: Industrials
Market cap: $19.2 billion
2021 estimated sales growth: 8%
Degree of operating leverage: 5.9
Source: Goldman Sachs
24. GartnerMarkets Insider
Ticker: IT
Sector: Information technology
Market cap: $14.7 billion
2021 estimated sales growth: 9%
Degree of operating leverage: 6.0
Source: Goldman Sachs
23. Juniper NetworksMarkets Insider
Ticker: JNPR
Sector: Information technology
Market cap: $7.7 billion
2021 estimated sales growth: 3%
Degree of operating leverage: 6.1
Source: Goldman Sachs
22. FiservMarkets Insider
Ticker: FISV
Sector: Information technology
Market cap: $73.9 billion
2021 estimated sales growth: 8%
Degree of operating leverage: 6.1
Source: Goldman Sachs
21. Dentsply SironaMarkets Insider
Ticker: XRAY
Sector: Healthcare
Market cap: $13 billion
2021 estimated sales growth: 17%
Degree of operating leverage: 6.2
Source: Goldman Sachs
See the rest of the story at Business Insider
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