Goldman Sachs has identified the stocks poised to crush the market thanks to tax cuts
- Goldman Sachs has been searching for the parts of the stock market poised to benefit most from the GOP tax law.
- The firm has narrowed it down to the companies expected to spend the most on reinvestment, but takes it a step further to include those seen getting the best returns out of that activity.
Since the passage of the GOP tax law, Goldman Sachs has been on a dogged quest to identify the areas of the stock market set to benefit most.
It's a more difficult task than it seems. After all, with the overall corporate tax rate lowered to such a degree, every company should theoretically be getting some relief. So which ones stand out?
Goldman has its sights set on companies that, first and foremost, are sinking a large portion of their tax savings back into their own businesses. The firm notes that, since the start of 2016, investors have been specifically rewarding companies that prioritize capital expenditures (capex) and research & development (R&D).
Over the period, a Goldman basket of stocks with the highest trailing 12-month combined capex and R&D yield returned almost double an index containing companies that buy back lots of stock and issue high dividends. This divergence can be seen in the chart below:
But Goldman's work doesn't end there. It takes the analysis a step further, identifying the companies it thinks will generate the highest return on that invested capital. The firm refers to this as "growth investment," and defines it as R&D plus capex in excess of depreciation.
Goldman's screen for companies that meet this requirement brings it to a 50-stock group it calls its High Growth Investment Ratio Basket, and the bank highly recommends investors seek out its component firms. The median stock in the index has reinvested 81% of its trailing three years of cash flow from operations, compared to just 13% for the average S&P 500 firm, Goldman says.
Here's a sampling of its 10 most pronounced components, ranked by the companies with the highest three-year growth investment ratio:
- Incyte (831%)
- Vertex Pharmaceuticals (495%)
- Autodesk (278%)
- Chesapeake Energy (220%)
- Bristol-Myers Squibb (189%)
- Regeneron Pharmaceuticals (167%)
- General Motors (157%)
- Cadence Design Systems (147%)
- Synopsys (126%)
- Eli Lilly (121%)