While the S&P 500 hit a new closing high last week and the index is up almost 24 percent for the year, the predictions for 2022 are somber. Goldman Sachs, which expects the S&P 500 to rise to 5,100 in 2022, is advising investors to look at high-margin stocks. What are high-margin stocks and should you buy them?
High-margin companies are better positioned to tackle an uncertain economic environment compared to companies that have a low margin. While companies with low margins can outperform in an economic upcycle since they usually have high operating leverage, high margin companies tend to outperform in periods of macro uncertainty.
The market breadth has been getting narrow.
While U.S. stock markets are still trading near their all-time highs, the market breadth or the ratio between gainers and losers has been weak. On one hand, we have companies that have soared to all-time highs, and on the other end of the spectrum, many companies are languishing near 52-week lows.
According to Goldman Sachs, the top 10 index constituents now account for 31 percent, which is the highest since at least 1980. The brokerage has identified 10 high-growth stocks with high margins that can outperform in a scenario where the market breadth continues to narrow.
Goldman Sachs picked 10 high-margin stocks for investors.
In the analysis, Goldman Sachs looked at Russell 3,000 companies with the exclusion of financials. It only considered companies with a market cap above $5 billion and the universe included companies that have a 15 percent projected consensus revenue growth and over 20 percent margin for 2023.
Goldman Sachs picked the following 10 high-margin stocks.
- Match Group
- Booking Holdings
- PayPal Holdings
- Marvell Technology
- Meta Platforms
- United Therapeutics
Goldman Sachs noted that these stocks trade at “only a small premium to similarly high growth companies” that have lower margins.
Two high-growth FAANG stocks are on the list.
Alphabet and Meta Platforms are two FAANG names on the list. While Alphabet is the best-performing FAANG stock of 2021, Facebook lost its position as the second-best FAANG to Apple. Both of these stocks look like good buys. Meta Platforms looks like a good bet considering its low valuations and the pivot towards metaverse.
Among the high-margin stocks picked by Goldman Sachs, PayPal looks like another good buy. The stock has lost a fifth of its market cap in 2021 and is trading near the 52-week highs. However, its valuations look attractive and it's among the companies that can survive economic turmoil much better than many fintech peers.
Mastercard is a good high-margin stock.
Mastercard has the highest consensus 2023 margin of 45 percent among the companies that Goldman Sachs has picked up. The stock has also been weak in 2021 and is trading in the red even though the broader markets are up in double digits.
Mastercard’s pivot towards blockchain makes it an interesting pick. Wall Street analysts also share Goldman Sachs’ optimism towards Mastercard. Its median target price of $430 is a premium of over 26 percent. Among the 35 analysts covering the stock, 31 recommend a buy, while four recommend a hold.