Goldman Sachs strategists think that interest rates will drive stocks over the next six months.
The Federal Reserve’s rate hikes will push the S&P 500 down to 3,600 in the next three months, they forecast. But they believe the Fed’s tightening cycle will end in May, sending stocks up to the strategists’ six-month forecast of 3,900. The index recently stood at 3,999.
Given that relatively flat forecast, the strategists recommend owning stocks with “resilient” profits margins.
They put together a list of Russell 1000 stocks that have grown their EBIT (earnings before interest and taxes) profit margins year to date.
The companies are expected by Wall Street analysts to grow margins in 2023. And projections have them in line to achieve margin growth from 2019 to 2022 in line with or less than the trend of the previous five years.
Here are 10 companies from the Goldman roster listed in order of the EBIT profit margin growth forecast for them in 2023 (starting with the highest growth).
- T-Mobile US (TMUS): 3.75 percentage points (EBIT profit margin growth forecast for 2023).
- Eli Lilly (LLY): 3.68 percentage points
- Liberty Formula One (FWONK): 3.06 percentage points
- International Flavors & Fragrances (IFF): 1.22 percentage points
- Aramark (ARMK): 0.92 percentage point
- Automatic Data Processing (ADP): 0.83 percentage point
- Honeywell International (HON): 0.46 percentage point
- Visa (V): 0.37 percentage point
- World Wrestling Entertainment (WWE): 0.36 percentage point
- Caterpillar (CAT): 0.25 percentage point.
Morningstar on T-Mobile
Morningstar analyst Michael Hodel gives the company a narrow moat and puts fair value for the stock at $165. It recently traded at $151.
“T-Mobile regained the lead in the U.S. wireless industry during the third quarter, adding more postpaid phone customers than any other carrier,” he wrote in a commentary.
“The firm clearly benefited from the price increases Verizon and AT&T implemented earlier this year. More impressive, profitability increased nicely as the bulk of the Sprint network decommissioning has been completed.”
Further, “T-Mobile’s strong brand and reputation, coupled with its industry-leading spectrum position, provides it with an opportunity to drive strong revenue and profit growth over the next couple of years,” Hodel said.
“Longer term, we expect a rational competitive landscape will allow the firm and its rivals to deliver stable, if modest, cash flow growth.”
Morningstar on Eli Lilly
Morningstar analyst Damien Conover assigns the company a wide moat and puts fair value for the stock at $256. It recently traded at $369.
“Eli Lilly reported mixed third-quarter results that were slightly below our expectations, but we don’t expect a major change to our fair value estimate based on the minor shortfall,” he wrote in a commentary.
“Nevertheless, Lilly carries a relatively high valuation, and we see the stock as overvalued. So any missteps may have an amplified downward impact.”
On the bright side, “the company continues to lead the drug group with innovative product launches that should reinforce its wide moat,” Conover said.
But, “while these new launches bode well over the long term, we expect some delays in margin expansion as the firm invests in 2023 for long-term success.”
The author of this story owns shares of Eli Lilly and Honeywell.
