In this Oct. 2, 2014, file photo, people pass a Wall Street subway stop, in New York's Financial District.Richard Drew/The Associated Press
With Wall Street expecting the S&P 500 to end the year not far from its present level, stock-picking has become attractive for investors seeking anything better than meager returns.
It's fortunate then that the upside to that strategy is growing, according to a new note from Goldman Sachs Group Inc. analysts led by David Kostin and Ben Snider. They say it's become more important in recent months to differentiate between companies on the index, as the correlation between different industries' stocks becomes weaker - and that two sectors in particular deserve a closer look.
Consumer discretionary and information technology sectors contain stocks with "the best combination of micro-driven returns and high expected firm-specific risk," the team writes, referring to superior odds that the shares react to company news, rather than moving on trends in the broader market. "These sectors therefore present the most fruitful stock-picking opportunities." By contrast, energy companies also have a high firm-specific risk, "but stock returns in the sector will be driven by macro, rather than company-specific micro factors." According to the analysts stock-picking opportunities are smallest within utilities.
Diving deeper, Goldman listed 20 stocks that have the highest potential returns based on their analysts' price targets for those stocks, as well as better odds of reacting to company-specific news rather than tracking the S&P 500 in general. Some big names on the list include First Solar Inc., eBay Inc., Marathon Petroleum Corp., and Cigna Corp. Only one of the so-called "FANG" stocks which led the market last year (named for Facebook Inc., Amazon.com, Inc., Netflix Inc., and Alphabet Inc.) made the cut: Netflix.
Here's the full list: First Solar Inc.; Hanesbrands Inc.; Regeneron Pharamaceuticals Inc.; Tyson Foods Inc.; Harman International Industries Inc.; Juniper Networks Inc.; Valero Energy Corp.; Cigna Corp.; Mylan NV; Royal Caribbean Cruises; Ltd.; Salesforce.com Inc.; Marathon Petroleum Corp.; Cabot Oil & Gas Corp.; eBay Inc.; FLIR Systems Inc.; Wyndham Worldwide Corp.; Netflix Inc.; CarMax Inc.; Ralph Lauren Corp. and Skyworks Solutions Inc..
Increased differentiation can mean more potential downside, too. Goldman also identified firms that are likely to react to micro events, but which have 'sell' or 'neutral' ratings from Goldman analysts. Names on this list include Transocean Ltd., Coach Inc., Kohl's Corp., and United Rentals Inc. All of them have 12-month price targets that are between 17 per cent and 33 per cent lower than they trade for today.