Tags: Kostin | stock | cyclical | invest

Goldman Sachs: US Stock Bargains Are Still Available for Smart Investors

By    |   Tuesday, 24 June 2014 12:40 PM

David Kostin, Goldman Sachs' chief U.S. equity strategist, believes there are still some bargain stocks to be had in the increasingly pricey stock market.

Kostin and his team predict the S&P 500 is destined to slog its way upward as earnings growth continues, with a 12-month target of 2,000, then 2,100 in 2015 and 2,200 in 2016, MarketWatch reported.

"Improving growth and low bond yields are positive for continued strong equity performance while elevated valuation gives us some pause," said Kostin in a client note.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

"Higher growth and low yields favor a shift into pro-cyclical equities but sticker shock following a prolonged rally makes the decision less clear."

He noted the forward price-earnings (P/E) ratio for the S&P 500 is at 16.5, compared with the average since 1976 of 13.5.

Kostin's recommendation is to emphasize cyclicals versus defensive stocks, according to MarketWatch. Kostin found 15 stocks that have a 25 percent forward P/E discount versus the S&P 500 median, promise faster 2015 earnings-per-share growth and a higher dividend yield than that median is.

The group includes consumer discretionary stocks: Ford, General Motors, Lowe's, Whirlpool and GameStop.

It also includes stocks from the materials sector: Dow Chemical, Freeport-McMoRan Copper & Gold, International Paper, Nucor and Avery Dennison. The others are Principal Financial, Aetna, Eaton, Stanley Black & Decker and Corning.

It might be possible to maintain gains in a bull market while protecting against the downside.

"The first thing investors should do is ignore what the pundits forecast, because no one can consistently predict a market correctly. Instead, they should focus on managing portfolio risk and what the market is implying," said Martin Pelletier, Portfolio Manager at TriVest Wealth Counsel, writes in a column for the Financial Post.

Pelletier suggested investors rebalance their portfolios at least annually, and quarterly if possible. "There have been plenty of studies that show the benefits of locking in profits in sectors and markets that have done well and reallocating the gains to other areas that have lagged."

He recommended investors also consider implementing an out-of-the-money covered call option strategy on their underlying positions in some cases.

Alternatively, Pelletier noted that purchasing put options can sometimes provide cheap insurance against a possible stock market downdraft. "This is a much more effective strategy than using stop-loss orders, which in many cases do not work in a correcting market," he said.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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InvestingAnalysis
David Kostin, Goldman Sachs' chief U.S. equity strategist, believes there are still some bargain stocks to be had in the increasingly pricey stock market.
Kostin, stock, cyclical, invest
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2014-40-24
Tuesday, 24 June 2014 12:40 PM
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