Investors are paying record amounts for stable high-growth companies. Here are 12 sleeper stocks Goldman says can deliver growth at budget prices.

Advertisement
Investors are paying record amounts for stable high-growth companies. Here are 12 sleeper stocks Goldman says can deliver growth at budget prices.

Advertisement
  • Goldman Sachs chief US equity strategist David Kostin says companies with a track record of stable earnings growth trade at a historically large premium compared to companies with more erratic results.
  • With the economy growing slowly and the market assailed by more volatility, investors are prizing companies that can deliver better than average growth. While that's made steady-growth stocks expensive, Kostin says some still trade at reasonable prices.
  • Kostin says the trend and the valuation gap won't change soon because it looks like the US economy will keep growing at a slow pace, and in those circumstances, investors prefer growth stocks to value stocks.
  • Click here for more BI Prime stories.

Is there a limit to how much investors will pay for steady, reliable earnings growth in an increasingly volatile market?

If there is, Goldman Sachs says we haven't found it yet. While stocks with steady profit growth are typically rewarded with higher valuations and those with volatile earnings trade at a small discount, David Kostin - Goldman's chief U.S. equity strategist - says the gap between them has never been bigger. And he doesn't expect that to change.

"Investors currently pay a record-high premium for stocks with stable earnings growth vs. firms with more volatile growth," Kostin wrote in a recent client note. "The most stable growers trade at a 23% valuation premium vs. the S&P 500, compared with a 25% discount for the most volatile growers."

Investors looking for a simple way to invest in high-quality companies with steady growth could consider the iShares Edge MSCI USA Quality Factor ETF.

Advertisement

While growth stocks have crushed value stocks throughout the 10-year bull market, Kostin explains that the gap between the groups is actually getting wider as the economy slows. Since value stocks do best when the economy is growing very quickly or shrinking, he says, that's unlikely to change soon.

Read more: The chief strategist at a $1.3 trillion brokerage breaks down how traders are using Roku as a pawn in the great streaming wars

"During periods of modest US economic growth (e.g. 0% to 3%, investors have typically assigned a scarcity premium to growth stocks that are able to generate idiosyncratic growth in excess of the economy," he said.

Despite investors' ongoing craving for growth stocks and the huge valuation gap, Kostin says some companies still offer steady earnings growth at reasonable prices. He's compiled a group of companies listed that have 10 years of stable EBITDA growth, but trade at "undemanding" valuations compared to their peers.

He excludes companies that had suffered a stretch of poor earnings within the past five years and companies that are expected to have a bad year in 2020.

Advertisement

The stocks below are ranked in decreasing order, based on the standard deviation of their quarterly EBITDA growth over the past 10 years. The smaller the number, the more stable that growth has been.

{{}}